UC-NRLF 


UNIVERSITY 
OF       ^ 


BINDING 
PREP.Diy. 

Y  LEE  [NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


ADMONITORY  ADDRESS 

AND 

FIRST  LESSON 


Copyrighted   1920 
J.  LEE  NICHOLSON   INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon    condition    that  the   same   is    not' 
to    be   made   the   subject   of  any   sale, 
gift  or  loan,  to  any  person  or  persons. 


GIFT 


STANDARD  BASIC  COURSE 

Addenda 

Students  are  requested  to  note  the  following-  corrections  of  typographical 
errors,  and  explanations  which  affect  Lessons  No.  5,  6,  8,  10,  11,  15,  22,  23.  26, 
27  and  28. 

Fifth  Lesson 

Labor  Piece  Work  Report,  Page  7. — The  amount  shown  as  $2.50  should  be 
$2.25. 

Answers — Sixth  Examination 

Paragraph  3,  Page  9.— "Indirect"  should  be  "direct." 

Questions — Eighth  Examination 

Material  Requisitions,  Page  5. —       ^ 
No.  2. — 250  tons  should  be  300  tons. 
No.  4. — Add  to  the  requisition.  Joints,  Plates  and  Spikes,  cost  $160.00. 

Answers — Tenth  Examination 
Billing  Record,  Page  9.— Total  $466.00  should  be  $446.00. 

Eleventh  Examination — Ledger  Accounts,  Page  J  7 
Amounts  Payable. — The  opening  credit  balance  should  be  dated  Jan.  1. 

Fifteenth  Lesson 

Problem  No.  2,  Page  4. — "The  following  production  is  reported  during  the 
cost  ])eriod,"  should  have  appeared  as  "The  following  charges  and  production 
were  reported  during  the  cost  period." 

The  explanation  under  Defective  Work  should  read :  "Defective  work  of 
Dept.  B  was  corrected  by  Dept.  A.  It  is  to  bear  its  proportion  of  overhead,  and 
the  total  cost  is  to  appear  upon  the  ledger  as  "Defective  work — Dept.  B,"  and 
thus  reported  upon  the  ending  trial  balance. 

The  productive,  labor  hours  for  Dept.  A.  product  No.  1,  shown  as  84583, 
should  be  84853.  and  the  total  productive  hours  when  added  should  be  122,630 
instead  of  122,360. 

Twenty-Second  Lesson — Explanation 

Profit  and  Loss  Statement,  Page  10. — Freight  and  Cartage  Outward, 
$232.50.  should  appear  as  a  selling  expense. 

Problem  No.  2. 

Expenditures,  Page  5. — 

Labor  in  yard $  300.00 

Labor  delivering  to  yard 510.00 

Labor  delivering  sales 10.50.00 


ftf^QlG40 


Expenditures,  Page  6. — 

Garage  labor $  200.00 

Truck  repairs , 320.00 

Depreciation  of  equipment 150.00 

Truck  supplies  used 480.00 

It  is  not  the  object  of  the  problem  to  distribute  the  expenditures  to  pur- 
chases or  sales.  For  this  purpose  additional  details  would  be  required.  The 
expenditures  are  to  appear  in  the  profit  and  loss  statement  as  "Yard  and  Trans- 
portation Expenses." 

Twenty -Third  Lesson — Explanation 

Page  6,  The  Expenditures.— "Selling  Expenses,"  $3,000.00,  and  "Admin- 
istrative Expenses,"  $2,000.00,  are  to  be  considered  as  part  of  the  estimated 
cost  for  overhead.  They  are  to  be  distributed  to  the  Sales  Classifications  on 
the  basis  of  the  percentage  of  the  cost  of  each  Sales  Classification  to  the  total 
cost  of  all  Sales  Classifications,  per  your  statement  of  cost  of  sales. 

Twenty-Sixth  Lesson — Explanation 

Page  6. — In  addition  to  the  six  statements  required  from  the  student,  Jour- 
nal entries  and  Ledger  accounts  are  also  to  be  submitted. 

Page  12,  Ledger  Account  No.  9. — Disregard  the  price  (cost  of  sales),  3.1878. 

Ledger  Account  No.  10. — Disregard  the  price  (cost  of  sales),  5.6556.    The  unit 
prices  are  not  essential.  '^ 

Page  11,  Ledger  Account  No.  7. — Disregard  the  price  (cost  of  sales),  3.3865. 

Twenty-Seventh  and  Twenty-Eighth  Lessons — Explanation 

Weaving  Department. — The  charges  during  the  period— excluding  material 
— amounted  to  $52,805.48. 

The  running  time  of  the  machines  was  18,000  hours,  and,  as  the  charges 
amounted  to  $52,805.48,  an  hourly  rate  of  $2.9336  was  established. 

Apparently,  there  was  work  in  process  at  January  1,  1919,  which  was  not 
properly  considered  when  the  Inventory  was  taken.  This  class  of  error  (liable 
to  occur  in  actual  practice)  shovild  be  carefully  guarded  against.  The  reports 
from  the  weaving  department  showed  18,100  machine  hours  on  production; 
therefore,  crediting  production  on  the  latter  basis  slightly  overcredits  the  de- 
partment, due  to  the  fact  that  the  department  was  not  charged  with  a  correct 
amount  for  the  beginning  Inventory. 

The  conditions  and  solution  of  the  problem  clearly  show  the  care  neces- 
sary in  order  to  avoid  the  class  of  error  abdve  referred  to. 

Page  17,  Account  No.  29. — As  "Sunday  Expenses"  should  be  "Sundry  Ex- 
penses." 


ADMONITORY  ADDRESS  TO  THE  STUDENT: 

The  principles  which  govern  Cost  Accounting  form  the  foundation  upon 
which  the  superstructure — accounting  for  costs — is  reared.  If  knowledge  of  the 
principles  is  defective,  the  superstructure  reared  thereon  will  be  endangered. 

The  principles  may  appear,  at  first  sight,  to  be  very  elementary,  and  the 
Student  may  be  inclined  to  give  them  superficial  consideration  only.  As  the 
Student  progresses,  he  will  perceive  that  matters  which  were  apparently  ele- 
mentary are  actually  complex,  we,  therefore,  caution  the  Student  against  super- 
ficial study  of  any  subject  entering  into  the  course. 

Answers  to  questions,  and  the  solutions  of  problems  require  the  most  care- 
ful and  thorough  study  before  they  are  sent  to  us.  We  shall  assume  they  repre- 
sent the  Student's  best  efforts. 

Avoid  hasty  and  inconsiderate  methods,  and  characterize  your  work  by  dis- 
playing a  reasonable  amount  of  neatness. 

As  soon  as  you  have  completed  a  lesson,  including  answers  to  questions, 
and  solutions  of  problems,  forward  the  answers  and  solutions  to  us.  Do  not 
allow  them  to  accumulate  at  your  end  of  the  line. 

Answers  to  examination  questions,  and  solutions  of  problems  are  to  be  writ- 
ten with  ink — or  writing  machine — upon  the  blank  paper  you  will  receive  with 
each  lesson,  both  sides  of  the  sheets  being  used.  Pencil  your  drafts  on  ordinary 
paper  before  finally  preparing  the  sheets  which  are  to  be  sent  to  us.  Retain  your 
pencilled  drafts  for  comparison  with  the  answers  and  solutions  which  will  ac- 
company each  succeeding  lesson. 

Each  sheet  is  to  be  headed  "Answers  to  questions  (or,  Solution  of  Problem 
No )  of  the examination." 

Each  question  is  to  be  answered  in  numerical  order,  and  each  answer  is  to  be 
prefixed  by  the  number  of  the  question. 

The  sheets  are  to  be  pinned  together,  the  last  sheet  bearing  the  signature 
of  the  student,  his  address,  and  the  date. 

The  instruction  course  is  based  upon  a  presentation,  in  the  manner  of  a 
lecture,  of  each  successive  step  which  will  develop  the  subject  of  cost  accounting 
in  a  natural  and  related  manner,  supplemented  by  a  series  of  questions  designed 
to  test  the  extent  to  which  the  Student  has  mastered  each  study.  Collateral 
reading  has  been  provided,  by  supplying  the  Student  with  a  copy  of  "Cost 
Accounting"  by  J.  Lee  Nicholson,  C.  P.  A.  and  J.  F.  D.  Rohrbach,  C.  P.  A.  This 
is  to  be  read,  as  part  of  each  lesson,  to  the  extent  directed  when  each  lesson  is 
advised  to  the  Student. 


{Lesson  One) 


Competent  cost  accountants  find  it  necessary  to  keep  abreast  of  the  times  by 
accumulating  a  library  of  leading  cost  accounting  literature.  The  Student  can- 
not put  his  leisure  to  better  purpose  than  by  reading  any  of  the  following  books 
on  the  subject  of  Costs: — 

Dealing  with  Theory,  Principles  and  Practice: 

"Cost  Accounts" — Hawkins. 

"Principles  of  Factory  Cost  Keeping" — Moxey. 

"Cost  Accounting,  Theory  and  Practice" — Nicholson. 

Dealing  with  Indirect  Expenses  or  Overhead: 

"Expense  Burden" — Church 

For  General  Reading: 

"Factory  Organization  and  Administration" — Diemer. 
"Bookkeeping  and  Cost  Accounting  for  Factories" — Kent. 

For  Engineering  Costs: 

"Cost  Keeping"— Gillette  &  Dana. 


(Lesson  One) 


FIRST  LESSON 

SUBJECTS:     COST  ACCOUNTING,  ELEMENTS  OF  COST. 

(Collateral  reading,  Chapters  i  and  2.) 

The  subject  is  presented  with  considerable  detail,  in  order  that  the  Student 
may,  at  the  outset,  have  an  adequate  conception  of  what  is  involved  in  studying 
it. 

The  Principal  Purposes  of  Cost  Accounting  are: 

(a)  To  analyze  and  record  the  cost   of  factory  expenditures,   represented 

by  materials,  labor  and  expenses.      This    purpose    relates    to   cost 
finding. 

(b)  To  so  compile  the  costs  as  to  show   the   total   production    cost   of   an 

order,  job,  article  or  process.    This  purpose  relates  to  accounting  for 
the  costs,  when  found. 

Efficiency,  Developed  by  Cost  Accounting: 

The  subject  of  efficiency  is  now  one  of  the  foremost  considerations  in  busi- 
ness management.  Its  object  is  to  secure  maximum  results  with  a  minimum 
expenditure  of  time,  labor  and  expense. 

In  cases  where  machinery  is  an  important  factor  in  factory  production,  effi- 
ciency must  be  considered  from  the  view  points  of  the  c'ost  accountant,  and  the 
efficiency  engineer.  The  cost  accountant  deals  with  actual  facts,  as  they  have 
occurred.  These  facts  he  is  able  to  present  to  the  management  in  comparative 
form.  The  technical  knowledge  possessed  by  the  management  will  enable  the 
determination  of  any  inefficiencies  which  may  exist.  Such  a  presentation  of  the 
facts  is  the  object  and  office  of  the  Cost  Accountant. 

The  efficiency  engineer  deals  with  the  results  which  may  reasonably  be  ex- 
pected from  a  proper  utilization  of  the  mechanical  units  which  constitute  a 
manufacturing  plant. 

Principal  Advantages  of  a  Cost  System : 

Cost  accounting  furnishes  many  bases  which  are  of  vital  importance'  in 
guiding  the  management,  and  assisting  executives  in  the  determination  of  busi- 
ness policies. 

The  principal  of  such  bases  are: 

A  Perpetual  Merchandise  Inventory: 

A  perpetual  merchandise  inventory  is  an  inventory  shown  to  exist  by  the 
books  of  account,  therefore,  the  inventory  is  ascertainable  at  any  time  when 
the  accounts  are  completely  posted,  hence  the  term  "perpetual  inventory."  It 
provides  a  check  upon  the  accuracy  of  a  physical  inventory,  that  is,  an  in- 
ventory taken  of  merchandise  on  hand  by  actual  inspection.  It  enables  the  prep- 
aration of  financial  and  statistical  statements  monthly,  or  for  a  cost  period, 
which  otherwise  could  only  be  prepared  at  such  time  as  a  physical  inventory 
was  taken,  usually  once  a  year. 

5 

(Lesson  One) 


The  financial  statements  referred  to  are  a  Balance  Sheet,  showing  the 
financial  condition  of  the  business  at  the  end  of  the  month,  or  cost  period,  and 
a  Manufacturing  and  profit  and  loss  statement,  showing  the  financial  opera- 
tions of  each  department  of  the  factory,  and  of  the  business  as  a  whole  during 
the  period. 

A  cost  system  also  supplies  information  from  which  various  statistical  state- 
ments may  be  prepared.  Costs  properly  classified,  as  to  each  article  manu- 
factured, and  as  to  operations,  departments  and  products,  will  provide  details 
vitally  important  to  the  management. 

The  management  must  know  the  costs  at  each  distinct  stage  of  the  business. 
Each  department  must  be  accurately  informed  of  its  production  costs  for  each 
cost  period,  and  it  must  be  informed  of  any  condition  occurring  elsewhere  in  the 
plant,  in  which  it  has  an  incidental  interest.  Harmonizing  the  relations  exist- 
ing between  departments  is  one  of  the  objects  of  a  cost  system. 

All  information — not  of  a  purely  financial  character — relating  to  any  manu- 
facturing business,  must  be  supplied  by  the  cost  department. 

Financial  statements  are  impossible  until  the  factory  costs  have  been  co- 
ordinated with  the  general  accounts  of  the  business.  Statistical  statements  are 
possible  only  from  the  Factory  Costs. 

The  factory  records  supply  all  information  necessary  for  employing  the 
Working  Capital  of  the  business  to  the  best  advantage.  The  full  import  of 
the  dependence  placed  upon  a  Cost  System  will  be  better  understood  by  con- 
sidering some  of  the  objects  gained. 

Obsolete  stocks,  or  excessive  stocks  may  be  brought  to  the  attention  of  the 
Sales  department,  enabling  the  department  to  stimulate  sales  which  will  ab- 
sorb such  stocks. 

In  cases  where  raw  materials  are  required  in  definitely  pre-arranged  mini- 
mum and  maximum  quantities,  the  purchasing  department  is  constantly  advised 
as  to  the  quantity  of  such  stocks  on  hand. 

A  factory  may  be  engaged  in  producing  several  lines  of  standard  product, 
some  of  which  are  satisfactorily  profitable,  whilst  others  may  be  less  profit- 
able, or  may  involve  an  actual  loss.  The  factory  costs  will  unerringly  indicate 
the  results  from  each  such  line,  enabling  the  management  and  the  sales  depart- 
ment to  concentrate  their  efforts  upon  the  more  profitable  articles.  This  means 
greater  efficiency  in  management  and  selling. 

In  every  plant  the  possibility  exists  of  losses  occurring  as  the  result  of 
negligences  and  inefficient  supervision.  It  is  a  duty  of  the  cost  department  to 
bring  such  losses  to  light:  Losses  of  materials,  loss  of  time  by  operatives  and 
machines  in  waiting  for  materials  upon  which  to  operate,  or  for  necessary  in- 
structions, loss  caused  by  substitutions  of  a  better  grade  of  material  than  is 
necessary  ,  because  the  required  grade  was  not  on  hand. 

All  matters  which  determine  the  policy  to  be  pursued  by  the  Executive 
branch  of  a  manufacturing  business  are  obtained  from  the  cost  department.  Sta- 
tistical statements  would  show  the  minimum  price  for  which  a  product  could 
be  profitably  sold.  They  would  enable  a  comparison  to  be  made  between 
actual  costs  and  standard,  or  estimated  costs. 

A  comparison  would  also  be  possible  as  to  the  varying  costs  occurring  under 
differing  wage  payment  plans,  that  is,  day  work,  piece  work,  differential  piece 
rate,  Premium,  and  Bonus  plans.  The  comparison  would  extend  to  hand  and 
machine  work. 

6 

(Lesson  One) 


A  comparison  would  also  be  possible  between  the  factory  cost  and  market 
cost  of  parts  of  the  product.  This  comparison  would  indicate  any  part  of  the 
product  which  might  be  advantageously  purchased  in  the  open  market. 

If  a  properly  conducted  cost  system  exists,  every  activity  of  the  factory 
is  under  its  scrutiny.  If  the  cost  accountant  competently  interprets  the  informa- 
tion supplied  by  the  system,  he  will  be  able  to  present  it  to  the  management 
in  a  form  which  will  preclude  the  possibility  of  its  significance  being  over- 
looked or  misunderstood. 

What  we  have  said  in  the  foregoing  presentation  of  the  subject — cost  ac- 
counting— is  merely  an  outline,  our  present  purpose  being  to  acquaint  the 
student  with  the  subject  at  the  outset  of  his  studies.  The  manner  in  which 
the  various  purposes  of  cost  accounting  are  accomplished  will  be  made  evident 
during  the  progress  of  the  course. 

PRE-REQUISITES  TO  SUCCESS  IN  THE  STUDY  OF  COST 

ACCOUNTING. 

The  Student  must  thoroughly  master  the  principles  which  govern  cost  ac- 
counting. This  is  not  a  difficult  matter,  because  the  principles  are  absolutely 
unchangeable.  They  are  applicable  to  any  industry,  irrespective  of  its  charac- 
ter, or  magnitude.  The  student  must  also  thoroughly  master  the  accounting 
requirements,   for   properly  representing  the  principles  in  an  accounting  system. 

The  foregoing  exposition  of  the  subject — Cost  Accounting — is  not  to  be 
considered  as  covering  every  consideration  that  is  applicable,  it  will,  hewever, 
suffice  for  the  accomplishment  of  our  purpose,  in  presenting  it,  the  purpose  be- 
ing to  impress  upon  the  Student  a  proper  measure  of .  its  importance  at  the 
commencement  of  his  studies. 

We  now  proceed  to  an  explanation  of  the  elements  which  constitute  manu- 
facturing costs. 

The  Elements  of  Cost. 

In  every  manufacturing  industry,  large  or  small,  irrespective  of  what  the 
manufactured  product  may  be,  the  costs  of  production  are  represented  by  ma- 
terial, labor  and  expense.  Each  one  of  these  elements  is  subject  to  sub- 
division, as  being  direct  and  indirect. 

A  direct  element  of  cost  is  one  which  may  be  clearly  identified  with  the 
product  upon  which  it  was  used,  and  of  which  it  becomes  a  part. 

An  indirect  element  of  cost  is  one  which  enters  into,  or  benefits  the  product 
in  such  a  way  as  that  its  application  to  a  definite  part  of  the  product  (an  order, 
job,  article,  or  process)  is  not  ascertainable,  or,  if  it  be  ascertainable,  an  un- 
reasonable expenditure  of  clerical  effort  would  be  required. 

Direct  Material  Costs  are  represented  by  the  Cost  of  the  materials  from 
which  the  product  is  made. 

Direct  Labor  Costs  are  represented  by  the  wages  paid  for  labor  specifically 
engaged  upon  the  product. 

Direct  Expense  Costs  are  represented  by  expenditures  which  are  specifically 
assignable  to  a  particular  order,  job,  article  or  process. 

An  instance  of  direct  expense  is  furnished  in  the  case  of  workmen  traveling 
to  and  from  a  job  when  engaged  at  a  distance  from  the  factory.  The  time 
taken  in  traveling,  the  transportation  and  hotel  expenses,  would  constitute  ex- 

7 

(.Lesson  One) 


penses  specifically  chargeable  to  the  job  upon  which  they  were  engaged,  the 
cost  therefore  would  be  a  direct  expense.  The  student  will  perceive  that  the 
illustration  classifies  the  time  of  the  workmen — when  traveling — as  an  element 
of  expense,  notwithstanding  the  fact  that  the  expense  is  represented  by  wages 
paid  for  the  time  so  employed.  It  is  an  expense,  as  distinguished  from  a  labor 
cost  by  reason  of  the  fact  that,  when  traveling,  the  workmen  were  not  speci- 
fically engaged  upon  productive  work. 

Indirect  Material  Costs  are  represented  by  the  cost  of  materials  which  can- 
not be  indentified  with  a  particular  order,  job,  article  or  process.  Examples  of 
indirect  materials  are  furnished  in  the  use  of  oils,  grease  and  waste,  used  for 
lubricating  and  cleaning  machines,  nails,  and  screws  used  in  small  quantities 
in  making  patterns,  moulding  sand  used  in  a  foundry. 

Indirect  Labor  Costs  are  represented  by  wages  paid  for  labor  not  speci- 
fically engaged  upon  the  product — such  as  wages  of  factory  superintendents, 
foreman  or  clerks,  timekeepers,  and  general  factory  laborers.  Whilst  all  are 
incidently  engaged  upon  work  connected  with  the  factory,  none  work  directly 
upon  the  product. 

Indirect  Expense  Costs  are  Represented  by  expenditures  not  specifically  as- 
signable to  a  definite  order,  job,  article  or  process,  such  as — Factory  rent,  in- 
surance, taxes,  depreciation,  maintenance  of  buildings  and  machinery,  light, 
heat,  power,  and  miscellaneous  factory  expenses. 

Factory  costs  terminate  when  the  product  of  the  factory  is  completed,  there- 
fore, the  three  elements  of  cost — materials,  labor,  and  expense — must  be  con- 
fined to  expenditures  which  directly,  or  indirectly  relate  to  the  product.  All 
other  expenditures  will  relate  to  the  selling  or  administrative  departments  of 
the  business. 

From  the  foregoing  explanation  of  the  constituent  elements  of  factory  costs, 
the  student  will  understand  the  cumulative  relations  which  exist  between  the 
costs  and  the  selling  price  of  the  product.  The  following  shows  the  relations, 
and  in  much  the  same  order  in  which  a  manufacturer  applies  costs  as  a  means 
of  determining  selling  price. 

Assuming  a  direct  material  cost  of  $3.20  a  direct  labor  cost  of  $2.90  in- 
direct costs  $1.10,  selling  expense  $1.05,  administrative  expense  $1.14,  and  a 
profit  of  $2.50,  the  cumulative  relations  between  the  costs  and  selling  price  may 
be  expressed  as  follows: 

Direct  Material  Cost $3-20 

Direct  Labor  Cost 2.90 


Prime  Cost $6.10 

Indirect   Costs. i.io 


Factory  Cost $7.20 

Selling  expense   .  .$1.05 

Adminst.  Expense     1.14 2.19 


Total  Cost $9-39 

Profit   2.50 


Selling  Price $11.89 


(Lesson  One) 


QUESTIONS  FORMING  THE  FIRST  EXAMINATION. 

The  questions  relate  only  to  subjects,  or  divisions  of  subjects,  covered  by 
the  presentation  of  cost  accounting  as  the  subject  of  the  first  lesson,  together 
with  chapters  i  and  2  of  the  collateral  reading. 

1.  Cost  accounting  performs  two  distinct  functions,  one  of  which  is  direct, 

the  other  indirect. 
Explain  the  direct  function. 
Explain  the  indirect  function. 

2.  What  accounting  purposes  are  factory  cost  records  limited  to? 

3.  What  are  the  distinguishing  characteristics  between  the  accounts  shown 

by  factory  cost  records,  and  the  accounts  shown  by  the  general  finan- 
cial books  of  a  manufacturing  business? 

4.  Factory  cost  records  must  present  a  requisite  degree  of  analysis,  in  order 

that  their  purpose  may  be  fulfilled. 
State,  in  a  general  way,  the  principal  analytical  requisites. 

5.  What  is  a  perpetual  inventory,  and  how  is  it  shown  to  exist? 

6.  Explain  the  meaning  of  the  term  "Physical  Inventory." 

7.  If  a  perpetual  inventory  is  provided  by  a  Cost  accounting  system,  what 

financial  statements  would  it  be   possible   to    prepare,    and    for   what 
periods? 

8.  A  detailed  cost  system  establishes  the  Cost  of  each  order,  job,  article,  or 

process. 

Explain  four  decided  advantages  which  accrue  to  the  management,  from 
this  service. 

9.  What  useful  purpose  would  be  served  by  a  cost  system,  for  a  manufactur- 

ing business  in  which  the  following  conditions  existed: 

(a)  Estimated  costs  are  required  in  advance? 

(b)  DiflEering  methods  are  in  use  with  respect  to  manual  and  machine 
employment? 

(c)  Differing  systems  are  in  use  for  the  payment  of  wages? 

10.  What  are  the  distinguishing  duties  of  a  cost  accountant  as  compared 

with  the  duties  to  be  rendered  by  an  efficiency  engineer? 

11.  How  would  you  classify  the  following  items,  connected  with  the  product 

of  a  factory? 

(a)  Steel — Used  in  making  the  product. 

(b)  Labor — Engaged  upon  the  product. 

(c)  Cost  of  a  telegram  to  the  customer,  respecting  changes  in  specifica- 
tions, required  in  the  manufacturing  process. 

12.  How  is  an  element  of  cost  determined  to  be  a  direct  cost? 

13.  Classify,  and  name  the  items  of  indirect  costs  which  are  usual  to  a  manu- 

facturing business,  and  briefly  state  the  reason  for  each  classification. 

14.  What  is  meant  by  the  prime  cost  of  a  product? 

15.  Why  are  certain  costs  classed  as  indirect  costs? 

16.  What  are  the  constituent  elements  of  factory  cost? 

17.  Is  a  discount  allowed  to  a  customer,  by  way  of  a  deduction  from  a  sales 

invoice,  a  factory  cost? 

9 

(Lesson  One) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


SECOND  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  he  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


SECOND  LESSON 

SUBJECTS  PRESENTED:    GENERAL  METHODS  OF  COST  FINDING 
—DEPARTMENTAL,  AND  PRODUCT  CLASSIFICATIONS. 

(Collateral  reading  chapters  3  and  4.) 

GENERAL  METHODS  OF  COST  FINDING. 

The  term  "Cost  Finding,"  means  the  ascertaining  of  costs,  and  a  "method 
of  Cost  Finding"  refers  to  the  means  employed  to  accomplish  that  purpose. 

All  cost  finding  methods  serve  their  purposes  by  collecting  the  costs  at 
certain  points  or  stages,  during  the  progress  of  product  through  a  factory.  The 
question  as  to  the  most  accurate  means,  by  which  the  costs  may  be  collected, 
must  be  decided  by  the  Cost  Accountant  in  each  case  where  a  cost  system  is  to 
be  employed. 

The  methods  are  governed  by  unalterable  principles.    If  the  principles  are 
thoroughly  understood,  they  will  always  indicate  the  cost  finding  method  which 
should  be  employed,  it  is,  therefore,  of  prime  importance  that  the  Student  has 
a  complete  understanding  of  the  principles,  as  now  presented: 
Requirements  of  Cost  Finding  Method,  and  the  Principles  Involved : 

Accurate  costs  cannot  be  ascertained,  by  any  method,  until  a  system  has 
been  arranged  for  providing  the  following  information: 

(a)  A  system  must  be  devised  for  reporting  the  kind,  quantity,  and  cost 

value  of  materials  used  in  the  product. 

(b)  The  system  of  reporting — above  referred  to — must  also  extend  to  the 

payments  made  for  labor,  and  for  indirect  expenses   (overhead)   in 
connection  with  the  product. 

(c)  A  system  must  be  devised  for  collecting  the  information  resulting  from 

(a)  and  (b)  above. 

(d)  A  system  must  be  devised  for  expressing   the   information   resulting 

from  (c)  above,  as  the  total  cost,  which  was  to  be  found. 

The  manner  in  which  the  above  stated  requirements  are  provided  for,  will 
depend  upon  which  of  the  two  generally  used  methods  of  cost  finding  are  to 
be  employed.    The  two  methods  are  designated  as : 

(i)     Special  order  method  of  cost  finding. 

(2)     Process  method  of  cost  finding. 

The  conditions  which  govern  each  method  are  as  follows : 

CONDITIONS  WHICH  GOVERN  THE  SPECIAL  ORDER  METHOD  OF 

COST  FINDING. 

A  "special  order"  is  to  be  understood  as  an  order  for  product  which  is  not 
standard,  or  regularly  made  product  of  the  factory,  a  special  order  would  there- 
fore involve  special  conditions  for  its  manufacture.  The  special  conditions  of 
manufacture,  here  referred  to,  are  the  precise  requisites  for  determining  the 
systems  which  must  be  devised  for  ascertaining  costs,  set  forth  under  (a) — (b) 
— (c)  and  (d)  preceding. 

3 

{Lesson  Two) 


The  system  of  reporting  the  material,  labor,  and  overhead  costs,  the  collect- 
ing of  the  costs,  and  expressing  the  total  cost,  will  relate  to  each  special  order 
separately.  Tersely  stated,  the  special  order  will  at  all  times  be  under  clear 
identification,  as  it  is  passing  through  the  factory,  as  product. 

CONDITIONS  WHICH  GOVERN  THE  PROCESS  METHOD  OF  COST 

FINDING. 

A  "process"  is  to  be  understood  as  factory  production  of  identical  product, 
in  a  more  or  less  continuous  manner,  the  manufacturing  conditions  would  there- 
fore apply  to  the  product  as  a  whole,  and  the  costs  would  also  apply  to  the 
product  as  a  whole,  the  cost  of  a  unit  of  the  product — expressed  by  count,  weight, 
or  measurement — being  found  by  dividing  the  total  cost  by  the  number  of  units 
contained  in  the  product. 

The  system  of  reporting  the  material,  labor  and  overhead  costs,  the  collect- 
ing of  the  costs,  and  expressing  the  cost,  will  relate  to  the  entire  product,  the 
cost  of  an  order  for  a  part  of  the  product  being  found  by  ascertaining  the  unit 
cost,  as  previously  stated. 

The  Student  will  have  perceived  that  an"  order  for  any  part  of  a  product 
which  is  manufactured  under  a  process  system  may  lose  its  identity  in  the 
process,  and  that  the  order  is — in  reality — for  a  specific  quantity  of  the  product 
which  might  be  supplied  from  the  finished  stock  room,  if  the  requisite  stock 
happened  to  be  on  hand. 

With  the  foregoing  distinguishing  features  of  the  special  order  and  process 
methods  of  cost  finding  firmly  in  mind,  the  Student  may  proceed  a  step  further, 
and  learn  that  occasions  often  exist,  in  a  factory,  which  necessitate  the  use 
of  both  systems  of  cost  finding. 

For  instance,  an  order  received  by  a  metal  working  plant  may  include  the 
making  of  castings,  which  are  to  be  machined  and  turned  out  as  finished  ma- 
chinery. Castings  for  other  orders  would  probably  be  made  from  the  same  melt, 
therefore,  the  order  in  question  would  lose  its  identity  in  the  melting  and 
casting  process.  In  this  case,  the  cost  of  the  entire  casting  process  would  be 
found  to  be  a  definite  amount,  per  pound,  of  castings  produced,  the  charge  to 
be  made  against  any  particular  order  being  the  per  pound  rate  multiplied  by 
the  number  of  pounds  in  the  weight  of  the  required  casting.  The  remaining 
costs  of  the  order  in  question  would  be  collected  directly  against  the  order  by 
the  special  order  method  of  cost  finding. 

At  this  point,  the  attention  of  the  Student  may  be  appropriately  directed 
to  the  possibility,  which  often  exists,  of  curtailing  clerical  details  by  grouping 
like  conditions  when  the  special  order  method  of  cost  finding  is  used. 

For  instance,  if  an  order  for  lOO  articles  embraces  two  or  more,  which  are 
identical  as  to  material,  style  and  finish,  clerical  eflfort  will  be  saved  by  group- 
ing the  costs  which  relate  to  similar  articles,  the  average  cost  of  each  article  in  a 
group  being  found  by  dividing  the  cost  of  each  group  by  the  number  of 
articles  included  in  the  group. 

The  various  forms,  or  reports,  required  for  ascertaining  and  collecting  costs 
will  be  the  subject  of  a  lesson  in  its  appropriate  course. 

DEPARTMENTAL  AND  PRODUCT  CLASSIFICATIONS. 

Classification  of  the  departments  of  a  factory  includes  a  classification  of 
distinctive  operations.     In  this  connection,  an  operation  is  classed  as  a  depart- 

4 

(Lesson  Two) 


ment,  it  is  therefore  not  an  uncommon  occurrence  for  several  operating  de- 
partments to  be  encompassed  within  the  larger  department  of  which  they  are 
a  part. 

The  object  of  classifying  departments  and  product,  is  to  establish  the  dis- 
tinctive, and  naturally  separate,  activities  of  a  factory,  and  the  differing 
character  of  its  product.  By  this  means,  costs  (particularly  indirect,  or  over- 
head costs)  may  be  directed  against  a  department,  operation,  or  process,  with 
absolute  precision,  which  otherwise  would  have  to  be  classed  as  general  factory 
operating  expenses,  and  therefore  distributed  over  the  product  arbitrarily. 

Classifications  of  departments  also  serve  the  important  purpose  of  enabling 
proof  to  be  made  of  the  cost  figures  which  apply  to  each  department. 

A  large  factory  will,  as  a  rule,  envelope  the  following  distinct  departments : 

Receiving  department,  store  room  departments,  purchasing  department, 
production  department,  manufacturing  departments,  sales  department,  ship- 
ping department,  cost  department,  and  executive  department. 

The  departments  are  subject  to  further  classification  as  "productive  depart- 
ments," that  is,  departments  engaged  directly  in  producing  the  factory  product, 
or  "non-productive  departments,"  that  is,  departments  which  although  con- 
cerned exclusively  with  factory  work — are  not  specifically  engaged  upon  the 
product,  such  as  the  store  room,  purchasing,  sales,  and  shipping  departments, 
or  "miscellaneous  departments,"  that  is,  departments  which  are  in  part  produc- 
tive and  non-productive,  such  as  the  Carpenter's  Shop  in  an  iron  working  in- 
dustry, which,  when  engaged  in  preparing  lumber  for  patterns  to  be  charged 
as  part  of  the  cost  of  an  order,  or  job,  is  productively  employed,  and  when  it  is 
preparing  lumber  for  maintenance  and  repairs  it  is  unproductively  employed. 

The  following  summary  will  enable  the  Student  to  perceive,  at  a  glance, 
the  prime  classifications  of  factory  departments,  which  may  be  sub-classified 
to  any  extent  which  particular  conditions  require: 

Productive  Departments: 

Departments   engaged   directly  upon  the  factory  product. 

Non-productive  Departments : 

Departments  engaged  upon  work  of  the  factory,  but  not  directly  upon  the 
product. 

Miscellaneous  Departments : 

Departments  partly  engaged  upon  the  product,  and  partly  upon  work  of  the 
factory  which  is  not  directly  upon  the  product. 

The  product  of  the  factory  is  chargeable  with  the  aggregate  of  these  depart- 
ment costs,  after  deducting  therefrom  costs  which  are  applicable  as  better- 
ments of  the  plant,  which  do  not  enter  into  the  manufacturing  statement. 

PRODUCT  CLASSIFICATIONS. 

A  classification  of  products  is  necessary  in  order  that  the  costs  of  various 
products  may  be  separately  ascertained.  As  previously  stated,  one  important 
object  of  a  cost  system  is  to  determine  the  cost  of  a  particular  product  in 
order  that  the  manufacturer  may  know  the  relative  profitableness  of  each 
line  of  product  upon  which  his  factory  is  engaged.  Classifications  of  the  pro- 
ducts enables  the  gathering  of  the  costs  of  each  product,  just  as  classifications 

(Lesson  Two) 


of  departments  enables  the  gathering  of  department  costs.     The  object  to  be 
accomplished  is  the  same  in  both  cases,  although  the  methods  may  vary. 

The  products  of  a  factory  usually  comprise : 

Standard  product,  that  is,  product  for  which  there  is  a  demand — more  or 
less  constant — in  the  open  market. 

Special  product,  that  is,  product  manufactured  to  special  order. 

Product  purchased  for  sale,  that  is,  product  not  manufactured  in  the 
factory,  but  occasionally  required  to  meet  the  demands  of  customers. 

When  the  above  stated  conditions,  or  any  two  of  them  represent  the  busi- 
ness of  a  manufacturer,  it  is  necessary  that  he  should  know  the  profits  derived 
from  each  class  of  product.  This  information  is  possible  only  by  classifying 
the  products. 

The  service  to  be  rendered  by  classification  and  a  separate  statement  of 
profit  for  each  product,  will  perhaps  be  better  understood  if  we  consider  a 
business  engaged  upon  the  three  lines  of  product  stated  above.  Suppose  the 
following  to  be  the  case.  Classifications  do  not  exist,  and  at  the  end  of  a  def- 
inite period,  a  month,  quarter,  half  year,  or  year,  the  manufacturing  statement 
shows  a  gross  profit  (covering  all  three  products)  of  $20,000.00. 

This  result  may  appear  to  be  satisfactory,  but,  as  a  matter  of  actual  fact, 
had  the  three  products  been  classified,  and  the  manufacturing  results  separately 
stated,  the  results  might  have  been  as  follows: 

Gross  profit  from  Standard  product    $30,000.00 

Gross  profit  from  product  purchased  for  sale.      1,000.00 

$31,000.00 
Manufacturing  loss  on  Special  product 11,000.00 

Gross  profit  from  all  products   $20,000.00 

The  above  stated  exhibit  would  bring  into  prominence  the  fact  that  the 
profits  from  the  Standard  product  of  the  factory  were  covering  an  unsatisfac- 
tory result  from  product  purchased  for  sale,  and  a  serious  loss  from  special 
product. 

QUESTIONS  FORMING  THE  SECOND  EXAMINATION. 

1.  What  requisites  must  be  provided  in  any  manufacturing  business,   for 

ascertaining  costs? 

2.  State  the  manufacturing  conditions  which   must  exist  in  a  factory,   to 

which  the  special  order  method  of  cost  finding  would  be  applicable. 

3.  State  the  manufacturing  conditions  to  which  the  process  method  of  cost 

finding  is  applicable. 

4.  If  the  process  method  of  cost  finding  is  employed,  and  the  costs  of  manu- 

facturing 2000  feet  of  stair  carpet  is  found  to  be  $600.00,  what  would 
be  the  cost  of  a  customer's  order  for  30  feet? 

5.  A  factory  may  produce  finished  parts,  which  are  placed  in  a  finished  parts 

store  room  pending  the  receipt  of  orders  for  completed  articles.     When 
such  orders  have  been  receivedj  the  assembling  department  requisitions 

'6 

(Lesson  Two) 


finished  parts  sufficient  for  the  purpose  of  putting  them  together  in  the 
number  of  completed  articles  required.  The  costs  of  the  finished  parts 
were  ascertained  by  the  process  method  of  cost  finding.  What  method 
of  cost  finding  is  applicable,  for  determining  the  cost  of  a  customer's 
order  for  a  given  number  of  completed  articles.  Give  reasons  for  your 
answer. 

6.  Suppose  a  factory  is  to  receive  an  order  for  500  articles,  each  article  to 

be  identically  the  same  with  respect  to  material,  style,  and  finish.  The 
required  articles  are  not  regular  product  of  the  factory,  they  must 
therefore  be  manufactured  specially.  What  method  of  cost  finding  is  ap- 
plicable, to  the  order,  and  how  would  the  cost  of  a  single  article  be  found? 

7.  Suppose  a  factory  to  receive  an  order  for  500  articles  each  of  which  is  dif- 

ferent as  to  material,  style,  and  finish,  and  that  the  required  articles  are 
not  regular  product  of  the  factory.  What  method  of  cost  finding  is  ap- 
plicable, and  how  would  the  actual  cost  (as  distinguished  from  average 
cost)  of  each  article  be  determined? 

8.  What    purpose    is    accomplished    by   classifying   the    departments    of   a 

factory  ? 

9.  Should  the  classifications  be  made  before,  or  after,  determining  which 

method  of  cost  finding  is  applicable,  and  why? 

10.  State  briefly,  but  clearly,  what  is  meant  by  a  productive  department. 

11.  State  briefly,  but  clearly,  what  is  meant  by: 

A  non-productive  department. 
A  miscellaneous  department. 

12.  Suppose  a  factory  maintains  a  repair  shop  for  repairing  the  machinery 

used.     How  would  you  classify  the  department? 

13.  Suppose  the  repair  shop   (question  12)  also  did  repair  work  chargeable 

to  customers.     How  would  you  classify  the  department? 

14.  Referring  to  the  distribution,  or  charging,  of  expenses — 
How  would  you  distribute  or  charge  the  following  expenses : 

(a)  Salary  of  the  General  Manager  of  the  Factory? 

(b)  Wages  of  a  foreman  in  Department  A? 

(c)  Wages  of  a  superintendent  for  Department  B,  C,  and  D? 
Give  reasons  in  each  case. 

15.  What  object  is  sought  by  classifying  the  product  of  a  factory? 

16.  How  would  you  classify  the  following  lines  which  constitute  the  business 

of  a  factory : 

(a)  Product  of  the  factory  made  for,  and  sold  from  stock? 

(b)  Product  made  for  customers  orders? 

(c)  Merchandise  purchased,  and  sold  without  incurring  any  manufac- 
turing expenses. 


{Lesson  Two) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


THIRD  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


THIRD  LESSON 

SUBJECTS:  DETAILED  REPORTS— FACTORY  ORDERS— MATERIAL 

REPORTS. 

(Collateral  reading,  chapters  5  and  6.) 

In  previous  presentations,  we  have  dealt  with  the  elements  of  cost,  meth- 
ods of  cost  finding,  and  classifications  for  departments,  and  products,  in  other 
words — we  have  explained  the  constituents  of  cost,  the  methods  by  which  costs 
are  found  and  the  arranging  of  the  departmental  divisions  of  a  factory  and 
the  separation  of  its  various  products  so  that  costs  may  be  applied  to  them 
separately. 

The  next  step  is  to  provide  the  means  by  which  costs  may  be  applied  to  the 
product  in  its  progressive  stages  through  the  factory. 

The  first  requisite  is  a  means  for  placing  an  order  for  product  in  operation, 
that  is,  putting  it  into  work.  This  is  accomplished  by  the  use  of  a  factory 
order. 

FACTORY  ORDERS. 

A  factory  order  is  a  written  notification  addressed  to  an  appropriate  factory 
authority  (Superintendent,  Manager,  Foreman,  or  Department)  that  a  certain 
product  is  to  be  manufactured,  or  a  certain  piece  of  work  is  to  be  done.  The  pre- 
cise form  which  should  characterize  a  factory  order  will  depend  upon  particular 
conditions,  the  following  forms,  however,  fully  illustrate  the  functions  of  the 
orders — 

Form  No.  i — A  simple  form  of  factory  order. 


Return  to  Office  immediately  upon  completion. 

FACTORY  ORDER  No.  1000 

Date  Jan.  2nd,  1920. 

To  E.  Forbes,  Mgr.  Production  Department. 

Manufacture  the  following  articles — complete  by  Jan.  14th,  1920. 


Quantity 


Description 


50 
144 
144 


Hand  Trucks,  Style  H.  T.  5 
Shovels,  Style  S  2 

Picks  Style  P  6 


Approved  J.  Wells 

by^ E.  Smith,  Sales  Dept. Manager 


(Lesson  Three) 


We  will  now  consider,  in  detail,  the  purposes  served  by  the  above  stated 
factory  order. 

(a)  The  order  is  to  be  returned  to  the  Office  immediately  on  completion. 
This  serves  the  purpose  of  a  notice  that  production  has  been  com- 
pleted, which  enables  the  preparation  of  shipping  instructions,  and 
the  assembling  of  the  various 'reports  which  cover  the  costs,  ascer- 
taining the  costs,  and  invoicing  the  order  to  the  customer. 

The  order  is  numbered  looo.  Each  order  issued  will  bear  a  consecu- 
tive number,  and  all  cost  reports  connected  with  an  order  will  refer 
to  the  order  by  its  number,  therefore,  the  number  (in  this  case,  lOOo) 
will  be  the  means  by  which  the  various  reports  of  costs  will  be  identi- 
fied with  factory  order  No.  lOoo. 

The  order  is  dated. 

E.  Forbes,  Manager  of  the  production  department,  is  authorized  to 
have  the  articles  manufactured  in  the  quantities  stated  upon  the 
order,  and  he  is  required  to  see  that  they  are  completed  by  Jan.  14th, 
1920. 

The  order  is  approved  by  E.  Smith,  of  the  Sales  Department,  who 
thereby  assumes  responsibility  for  the  correctness  of  the  quantities, 
the  description  of  the  articles,  and  the  date  for  completion. 

The  order  is  finally  signed  by  J.  Wells,  the  factory  manager,  as  the 
supreme  authority  for  factory  operations. 

All  work  undertaken  in  the  factory  must  be  authorized  by  a  written  fac- 
tory order,  which  must  be '  explicitly  descriptive.  Under  no  circumstances 
should  any  work  in  the  factory  be  undertaken  under  verbal  orders. 

The  Student  will  have  noticed  that  the  foregoing  illustration  of  a  simple 
form  of  factory  order  does  not  provide  for  gathering  the  costs  upon  the  order. 
It  is  merely  a  notification  that  certain  articles  are  required  at  a  given  date.  The 
form  would  suffice  in  a  factory  which  embraced  few  departments. 

The  following  form  shows  a  development  of  the  factory  order,  shown  by  our 
first  illustration,  to  the  extent  that  it  also  serves  the  purpose  of  a  requisition 
upon  the  store  room  for  the  materials  required  to  produce  the  articles  covered 
by  the  order.  When  the  factory  order  is  thus  developed,  a  copy  should  be 
sent  to  the  stock  clerk,  in  order  that  he  may  have  the  materials  in  readiness 
when  the  original  order  is  presented  as  a  requisition: 

Form  No.  2 — Combined  Factory  Order,  and  Material  Requisition. 


(b) 


(c) 
(d) 


(e) 


(f) 


Factory  Order 

To Department. 

Manufacture  the  following 


No 

Date.  .  .  . 
Complete . 


Material  Required 


Quantity        Rate         Amount 


Approved 

by 

Material  received  by. 


(Signed) . 


Manager. 


{Lesson  Three) 


Form  No.  2  provides  all  the  details  provided  by  Form  No.  i,  and  in  addition, 
it  describes  the  materials  required,  the  quantity  required,  the  unit  cost  of  each 
kind  of  the  material,  the  total  cost  of  each  kind  of  material,  and  the  total  ma- 
terial cost  of  the  entire  order. 

The  two  illustrations  will  convey  to  the  mind  of  the  Student  the  possibility 
of  further  developing  a  factory  order  to  the  point  of  showing  also  the  labor 
and  overhead  costs.  If  developed  to  this  extent  the  order  would  serve  the 
purpose  of  a  cost  sheet. 

The  full  import  of  a  highly  developed  factory  order,  will  be  better  under- 
stood by  the  Student  when,  at  the  appropriate  stage  of  the  course,  he  has 
studied  the  subject  of  collecting  costs.  Our  present  object  is  to  unfold  the  pro- 
cedure of  factory  routine,  with  respect  to  the  issuing  of  production  orders, 
and  the  procedure  to  be  followed  in  handling  material. 

PROCEDURE  IN  HANDLING  MATERIAL  AND  MATERIAL 

REPORTS. 

In  order  that  a  clear  conception  may  follow  the  consideration  of  procedure 
in  handling  material,  we  will  review  it  in  the  order  of  sequence  through  which 
the  material  passes. 

(i)     The  necessity  for  purchasing  material  must  be  advised  to  the  proper 
authority. 

(2)  The  material  must  be  purchased. 

(3)  In  due  time  it  arrives,  and  must  be  received. 

(4)  It  must  then  be  stored. 

(5)  Quantities,  and  cost  must  be  recorded. 

(6)  It  will  be  requisitioned  for  use. 

(7)  Or,  it  will  form  part  of  the  inventory. 

(i)     Advising  the  Necessity  for  Purchasing  Material. 

This  service  is  accomplished  by  the  issuing  of  a  Purchase  Requisition — 
see  form  No.  8,  collateral  reading,  page  66.  The  explicit  character  of  the  form 
renders  further  explanation  unnecessary,  except  to  direct  the  attention  of  the 
Student  to  the  fact  that,  (as  in  the  case  of  factory  orders,  previously  referred 
to)  each  form  bears  a  number,  and  consecutive  numbers  are  to  be  used  upon 
all  forms  issued.  Provision  is  also  made  upon  the  form,  for  "Purchase  order 
number,"  and  "Date  of  Purchase  Order."  After  this  information  has  been 
entered  upon  the  form,  it  is  a  complete  record  of  the  fact  that  the  purchasing 
department  was  advised  of  the  necessity  for  purchasing  stated  quantities  of 
stated  materials,  and  that  the  department  made  the  purchase  under  their 
purchase  order  bearing  date  and  number  as  shown  upon  the  form. 

(2)     The  Material  Must  be  Purchased. 

Purchases  of  Materials  are  effected  through  the  instrumentality  of  a  Pur- 
chase order,  which  is  the  natural  complement  of  the  Purchase  Requisition  pre- 
viously explained.  A  form  of  Purchase  Order  is  shown  as  Form  No.  9, 
collateral  reading,  page  69. 

As  in  the  case  of  the  Factory  Order,  and  the  Material  Requisition,  the 
Purchase  Order  bears  a  number,  and  each  purchase  order  is  consecutively 
numbered. 

,5 

(Lesson  Three)  '^' 


(3)  The  Materials  Arrive  and  are  to  be  Received. 

The  records  for  detailing,  material  received  are  a  Receiving  Record,  Form 
No.  II — collateral  reading,  page  73,  and  a  Report  of  Material  Received, 
Form  No.  12,  collateral  reading  page  75.  The  former  record  deals  v^^ith  the 
number  of  packages  received,  the  description  of  each  package  and  its  alleged 
contents,  or  a  description  of  materials  received  in  a  more  or  less  bulked  con- 
dition.   With  respect  to  these  details  it  is  a  confirmation  of  the  Invoice. 

The  latter  form  deals  with  quantities,  quality,  and  description,  by  actual 
inspection,  in  these  respects,  therefore,  it  is  a  confirmation  of  the  purchase  order 
and  of  the  Invoice.  The  same  requirement  exists,  and  is  provided  for,  of  num- 
bering each  form,  and  consecutively  numbering  all  forms  issued. 

(4)  The  Material  Must  be  Stored. 

The  most  important  requisites  to  be  provided  for  in  storing  material,  are: 
Proximity  to  operating  departments. 

Adequate  space  for  preserving  classifications  of  materials. 
Sufficient  light. 

Adequate  aisle  space,  in  which  to  move  the  stock. 

The  imposition  of  conditions  which  will  place  responsibility  for  safeguard- 
ing the  stock. 

(5)  Quantities  and  Cost  Must  be  Recorded. 

The  detailed  extent,  to  which  store  room  records  are  to  be  kept,  vary  of 
course  with  particular  requirements.  If  an  inventory  is  to  be  provided  for,  and 
classifications  made,  the  store  room  records  may  take  the  form  of  Ledger  Ac- 
counts for  each  classification  both  as  to  quantities  on  hand,  and  their  cost 
value. 

(6)  Material  Requisitions. 

A  material  requisition  is  a  written  order  upon  the  storekeeper,  for  delivery 
of  definite  quantities  of  articles  or  materials  to  a  stated  department,  for  a  stated 
purpose.  The  requisitions  are  numbered  consecutively,  and  provision  is  made 
for  recording  the  number  of  the  order  or  process  for  which  the  material  is  to  be 
used.     See  form  No.  16,  collateral  reading,  page  83. 

(7)  Merchandise  Inventory. 

In  the  first  lesson,  the  Student  learned  that  the  providing  of  a  perpetual  in- 
ventory was  one  of  the  advantages  accruing  from  a  detailed  cost  system.  By 
closely  following  the  preceding  description  of  the  procedure  in  handling  ma- 
terials from  the  initial  stage  of  purchasing  to  the  final  stage — the  inventory — 
he  will  perceive  how  the  perpetual  inventory  is  accomplished,  so  far  as  pur- 
chases and  withdrawals  of  materials  are  concerned.  The  procedure  for  deal- 
ing with  finished  and  part  finished  stock  will  be  the  subject  of  a  future  lesson. 

SPECIAL  REPORTS  REQUIRED  FOR  ADJUSTMENT  PURPOSES. 

In  order  that  the  Store  room  records,  and  the  records  which  control  them, 
may  be  kept  in  proper  form,  provision  must  be  made  for  reporting  the  following 
contingencies  which  are  liable  to  occur  in  any  industry. 

(a)  Reporting  merchandise  returned  by  customers. 

(b)  Department  Reports  of  Materials  used, 

6 

(Lesson  Three) 


(c)     Reporting  material   transferred  from  one  store  room  to  another,  or 
transferred  from  one  operating  department  to  another. 

These  adjustments  may  now  be  considered  in  the  above  stated  order: 

(a)  Reporting  Merchandise  Returned  by  Customers. 

.Form  No.  i8,  collateral  reading,  page  87,  covers  the  necessary  requirements 
for  charging  the  store  room  records  vi^ith  the  cost  of  the  returned  merchandise, 
for  adjusting  the  sales  accounts,  and  for  adjusting  the  account  with  the 
customer. 

It  will  be  observed  that  the  forms  are  to  be  consecutively  numbered  and 
that  entry  is  to  be  made  of  the  number  of  the  order,  or  process  under  which 
the  merchandise  (now  returned)  was  manufactured. 

The  form  should  be  carefully  studied,  and  its  every  purpose  clearly  com- 
prehended by  the  Student. 

(b)  Department  Reports  of  Materials  Used, 

Form  No.  19,  collateral  reading,  page  89,  covers  the  necessary  requirements 
for  adjusting  the  store  room  records  in  cases  where  the  materials  requisitioned 
were  in  bulk,  for  use  as  required,  or  where  the  materials  requisitioned  for  a 
particular  order,  or  job,  differed  in  any  manner  from  the  materials  actually 
used  for  the  order,  or  job.  In  these  cases,  the  Departmental  Reports  of  Ma- 
terials used  enables  an  adjustment  upon  the  main  store  room  records  for  an 
overplus  of  materials  returned  by  the  operating  department,  or  by  adjusting  the 
accounts  connected  with  a  sub-store  room  if  one  is  maintained  by  the  operat- 
ing department. 

(c)  Reporting  Transfers  Between  Store  Rooms,  or  Operating  Departments. 

Form  No.  20,  collateral  reading,  page  90,  covers  the  necessary  require- 
ments for  adjusting  the  department  accounts  by  charging  the  department  which 
receives  the  stock,  and  crediting  the  department  from  which  the  stock  was 
transferred. 

Importance  of  Consecutively  Numbering  all  Reports  Used  in  a  Factory. 

We  cannot  too  strongly  emphasize  the  importance  of  providing  a  different 
series  of  numbers  for  each  form  of  report  used  in  a  factory,  and  consecutively 
numbering  the  forms  used  within  each  of  the  series.  Each  form  should  also 
bear  the  number  of  any  other  form  to  which  it  relates.  Consecutive  numbering 
provides  a  safeguard  against  any  report  not  being  accounted  for,  and  the  relat- 
ing numbers  facilitate  investigation  in  cases  where  relative  details  are  to  be 
traced. 

INVENTORY  TEST. 

The  accuracy  of  a  book  (or  perpetual)  inventory,  is  capable  of  being 
proved  only  by  comparing  it  with  the  actual  stock  on  hand.  As  a  rule  an  actual 
(physical)  inventory  is  not  taken  more  often  than  once  yearly.  If  an  appreci- 
able difference  between  the  two  inventories  should  at  that  time  be  found  to 
exist,  considerable  detail  would  be  involved  in  tracing  it. 

Verifications  may  be  accomplished,  from  time  to  time,  between  the  taking 
of  physical  inventories,  by  comparing  the  book  inventory  of  certain  lines  of 
stock  with  the  actual  stock  on  hand.  This  is  what  is  meant  by  an  "Inventory 
Test."  The  tests  may  be  made  with  sufficient  frequency  as  to  cover  the  greater 
part,  or  perhaps  all  of  the  stock  during  a  year.    A  test  should  in  all  cases  be 

7 

(Lesson  Three)  ' 


made  when  a  line  of  the  stock  has  reached  a  point  so  low  as  that  a  comparison 
may  be  possible  with  little  effort. 

QUESTIONS  FORMING  THE  THIRD  EXAMINATION. 

1.  In  view  of  the  fact  that  the  most  simple  form  of  a  factory  order  is  a 

mere    notification   that    certain  articles   are   to   be   manufactured,   is   it 
necessary  to  go  to  the  trouble  of  issuing  such  an  order? 
If  so,  why? 

2.  If  a  factory  order  describes  the  articles  which  are  to  be  manufactured,  and 

also  states  the  kind  and  quantity  of  material  required  for  the  purpose, 
what  form  of  material  requisition  would  you  use  for  obtaining  the  ma- 
terial from  the  store  room? 

3.  When  is  a  factory  order  a  production  order? 

4.  Would  a  factory  order  for  construction  of  machinery,  to  be  used  in  the 

factory,  be  classed  as  a  production  order?  Give  reasons  for  your 
answer. 

5.  How  would  you  classify  an  order  for  the  production  of  the  following: 

Articles  requiring  special  manufacture?    Staple  product  of  a  factory? 

6.  If  a  production  order  is  issued  for  the  manufacture  of  500  hats,  and  each 

hat  is  represented  by  3  parts  separately  manufactured,  would  the  order 
for  500  hats  suffice  for  factory  requirements?  If  so,  give  reasons.  If 
not,  state  what  additional  orders  would  be  necessary. 

7.  Assume  the  following  conditions: 

(a)  A  store  room  clerk  notices  that  the  stock  on  hand  of  a  certain  ma- 
terial is  low.  He  requests  the  purchasing  department,  on  an  ap- 
propriate form  to  purchase  more  of  the  material.  What  is  the 
name  of  the  appropriate  form  he  uses? 

8.  What  factory  forms,  and  commercial  documents,  if  attached  each  to  the 

other,  would  represent  the  completion  of  a  transaction  involving  the 
purchasing  of  material? 

9.  If  a  factory  is  engaged  in  manufacturing  standard,  or  staple  product, 

and  quantities  and  kind  of  material  required  are  invariable,  is  it  neces- 
sary to  issue  material  requisitions  for  each  production  order  issued? 
Give  a  concise   explanation. 

10.  If  department  A  requisitions   1000  pounds  of  wool  from  the  general  store 

room,   for   production   order   number  2078  and  uses  only  600  pounds  of 
•  the  wool  in  the  production  of  the  order,  retaining  400  pounds  for  future 
use,  what  is  the  procedure  to  be  followed,  by  way  of  adjustment? 

11.  Referring  to  question  No.  10,  if  department  A  used  1200  pounds  of  wool 

for  production  order  No.  2078,  obtaining  200  pounds  of  the  wool  from 
department  B,  what  procedure  is  necessary  by  way  of  adjustment?    • 

12.  What  is  the  procedure  which  should  characterize  the  numbering  of  all 

factory  reports? 

13.  What  procedure  is  it  necessary  to  follow  when  material  is  returned  to 

stock?  • 

14.  What   charges   constitute  the  cost  of  material? 

(.Lesson  Three) 


15-  Prepare  a  simple  form  of  factory  order,  in  each  case,  which  will  serve  the 
purpose  of  notifying  a  factory  department  that  the  following  work  is 
to  be  put  in  operation: 

(a)  5  gross  cardboard  boxes — I2"x4"x6" — to  be  completed  in  two  days. 

(b)  Roll  8  rubber  mats,  approximately  8'x6'x^". 

(c)  Under  factory  order  No.  1200,   Department   A  turned  out   product 

which  was  defective.    Department  C  is  to  repair  the  defect,  which 
was  occasioned  by  using  screws  that  were  too  short. 

16,  Prepare  a  material  reouisition  for  the  following,  required  for  (b),  prob- 
lem No.  15. 

120  lbs.  Raw  Para,  grade  No.  i;  30  lbs.  Raw  Para,  grade  No.  4;  15  lbs. 
Chalk  Alloy. 


(Lesson  Three) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


FOURTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


.  JTUen  V\DP  nUDM  33  J    I 


U/iii     JiJJJA  icuj 


:ICA 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


]ArOOn  T    L.TT'CT' 


v^  1 


FOURTH  LESSON 

SUBJECT:    WAGE  SYSTEMS,  FACTORY  ORDERS  AND  MATERIAL 

REPORTS  FURTHER  DEVELOPED. 

(Collateral  reading,  Chapters  5, 6  and  7.) 

Wage  Systems: 

All  wage  systems  which  aim  to  compensate  an  employee  according  to  his 
merits,  are  based  upon  the  expectation  that  the  possibility  of  earning  higher 
wages  will  stimulate  the  employee  to  greater  effort,  and  that  the  higher  wages 
thus  gained  will  be  more  than  offset  to  the  employer  by  an  increased  produc- 
tion, which  will  reduce  the  labor  cost  of  the  product.  The  mutual  advantage 
to  employer  and  employee  will  be  better  understood  by  considering  the  follow- 
ing illustration: 

If  the  wage  rate  is  60  cents  per  hour,  and  the  hourly  production  of  an  em- 
ployee is  ordinarily  10  units,  the  labor  cost  of  each  unit  would  be  6  cents.  If 
the  employer,  by  way  of  stimulating  his  employees  to  greater  effort,  offers 
65  cents  per  hour  for  the  production  of  12  units,  and  12  units  are  produced, 
the  employee  gains  5  cents  per  hour.  On  the  other  hand,  the  employer's  gain 
is  represented  by  a  reduction  in  the  labor  cost  of  each  unit  from  6  cents  to 
5  5/12  cents. 

Mutual  advantage — within  reasonable  limits — to  employer  and  employee  , 
will  generally  be  the  deciding  factor  for  or  against  any  wage  system. 

A  wage  system  based  upon  quantity  of  product  will  necessitate  a  more 
minute  inspection  of  the  product,  as  the  efforts  of  the  employee  to  increase  his 
production — and  his  wages — may  affect  the  quality  of  his  work. 

Wage  systems  influence  the  forms  of  labor  reports  which  will  be  required — 
the  Cost  Accountant  must  therefore  familiarize  himself  with  the  various  systems. 

Day  Rate  System: 

The  day  rate  system  for  wages  payment  is  the  oldest  system  in  use.  It  is  un- 
favorable because  it  does  not  measurably  compensate  a  workman  for  the 
amount  of  product  he  turns  out.  Lack  of  incentive  for  best  effort  is  one  of  its 
characteristics,  and  loss  of  time,  which  should  have  been  avoided,  is  one  of  the 
results. 

The  vast  importance  to  an  employer  of  reducing  lost  time,  will  be  appreciated 
by  an  inspection  of  the  following  tabulations,  which  is  based  upon  an  average 
loss  of  5  minutes  per  day  by  each  work  nan,  9  hours  constituting  a  day's  work — 
300  working  days  to  the  year. 

Daily  Wage: 

Number  of  workmen,  and  Annual  Loss  by  Each  Group. 

I  20  30  50  100 

$3.00  8.34  166.80  250.20  417.00  834.00 

4.00  1 1. 12  222.40  333.60  556.00  1,112.00 

I 

(Lesson  Four) 


The  elimination  of  lost  time  is  one  of  the  purposes  of  the  several  Wago 
Systems  which  have  supplanted  the  day  rate  system. 

Piece  Rate  System: 

The  piece  rate  system  bases  the  workman's  compensation  upon  the  amount  of 
work  done. 

The  following  comparative  details  show  the  elements  of  cost  which  the  piece 
late  system  is  expected  to  favorably  affect. 

Day  Rate  System — 8  hr.  Day. Piece  Rate  System — 8  hr.  Day. 

Production  lo  Units  Daily          Labor     Production   13  Units  Daily       Labor 
Cost Cost 

Labor  Cost  (fixed)  $3.00     Labor  Cost  (say  .32  per  unit)     $4.16 
Material  Cost  (10  units)  4.00     Material  Cost  (13  units)  5.20 

Overhead  Expenses:  Overhead  Expenses: 

Assumed  to  be  20  cents  per  Assumed  to  be  the  same  as 

productive  labor  hour,  there-  in  the  case  of  the  production 

fore  for  day  of  8  hours.  1.60        under  day  rate  system:  1.60 

Total  Cost  (10  Units)  $8.60     Total  Cost  (13  units)  $10.96 

Cost  per  Unit  $  .86     Cost  per  Unit  $  .84-4/13 

The  comparative  illustration  shows  that  although  the  labor  cost  under  the 
piece  rate  system  has  been  increased  2  cents  per  unit  of  product,  the  actual  cost 
to  the  employer  has  been  reduced  by  1-9/13  cents  per  unit,  as  follows: 

Cost  of  overhead  per  unit  (for  10  units)  .16  cents 

Cost  of  overhead  per  unit  (for  13  units)  .12  4/13 

Reduction  in  overhead  cost,  per  unit  .03  9/13  cents 

Deduct,  increased  labor  cost,  per  unit  .02 

Net  Reduction  in  Total  Cost  .01  9/13  cents 

The  question  of  whether  the  increased  production  would  increase  the  over- 
head expenses,  is  a  matter  for  the  most  careful  consideration  in  determining  a 
piece  rate  wage;  in  fact,  it  is  the  dominant  question,  since  any  saving  to  the  em- 
ployer from  increased  production,  consequent  upon  an  increased  unit  labor  cost, 
cannot  be  realized  in  any  manner  other  than  by  an  adequate  reduction  in  the 
unit  cost  of  overhead  expenses. 

Differential  Rate  System: 

This  is  the  Piece  Rate  System  modified  by  an  application  of  time  rate  to  the 
work.    The  following  illustration  will  serve  as  an  explanation  of  the  system. 

Assume  the  Following  Conditions : 

A  workman  receives  30  cents  for  each  completed  unit.  His  average  produc- 
tion is  10  units  per  day  of  8  hours.  A  differential  rate  is  established,  which 
provides : 

If  he  continues  to  produce  10  units  in  8  hours,  the  30  cent  rate  will  continue. 

If  he  produces  12  perfect  units  in  8  hours,  his  wages  are  to  be  31  cents  for 
each  unit. 

If  he  produces  14  perfect  units  in  8  hours,  his  wages  are  to  be  32  cents  for 
each  unit. 

If  by  reason  of  slow,  or  imperfect  work  he  produces  only  9  perfect  units  in 
8  hours,  his  wages  are  to  drop  to  29  cents  for  each  unit. 

4 

{Lesson  Four) 


9 

.29 

$2.61 

.90 

$1.50 

$5-01 

10 

•30 

3.00 

1. 00 

1.50 

5-50 

12 

•31 

3-72 

1.20 

1-55 

6.47 

H 

•32 

4.48 

1.40 

1,60 

7.48 

Also  Assvime: 

Cost  of  material  to  be  10  cents  per  unit. 

Overhead  expenses  to  be  $1.50  per  day  when  10  units  are  produced. 

$1.55  per  day  when  12  units  are  produced. 

$1.60  per  day  when  14  units  are  produced. 

The  following  table  shows  the  effect  of  the  foregoing  conditions  upon  pro- 
duction costs  to  the  employer,  and  upon  the  wages  of  the  workman. 

No.  of  units     Wages  per  unit     Labor  Cost     Cost  of  Material     Cost  of  Overhead    Total  Cost     Cost  per  unit 

•55    2/3 

.55 

.53  11/12 

-53    3/7 

The  crucial  question  arising,  from  an  inspection  of  the  table,  is: — Are  the 
gains  to  the  workman  and  to  the  employer,  for  the  production  of  12  and  14  units, 
equitably  apportioned?  If  any  marked  inequality  exists,  the  system  will  ulti- 
mately fail.  The  table  shows  a  decided  gain  in  wages  to  the  workmen,  and  only 
a  fractional  gain  to  the  employer.  Consideration  must,  however,  be  given  to  the 
fact  that  his  fractional  gain  is  in  respect  of  a  single  unit  produced.  If  the  frac- 
tional gain  were  multiplied  by  thousands  of  units  produced,  and  the  selling  price 
remained  the  same,  his  total  gain  would  probably  be  a  very  substantial  one. 

Premium  Plan: 

The  premium  plan  of  wage  payment  bases  minimum  wages  on  a  time  rate, 
and  provides  for  extra  rates  for  time  saved  in  the  work. 

For  the  purpose  of  illustration,  suppose  a  workman  receives  30  cents  per  hour 
for  a  certain  average  amount  of  work  done  in  a  day  of  8  hours.  A  premium  ar- 
rangement might  be  made,  under  which  if  he  did  the  same  amount  of  work  in  7 
hours  he  should  receive  (7x30)  $2.10,  and  for  the  hour  saved  he  should  receive  15 
cents,  his  compensation  for  7  hours  of  work  being  $2.25.  He  then  has  another 
hour  to  work,  for  which  he  may  earn  30  cents,  and  a  further  premium. 

Increased  production  (and  the  resulting  decrease  in  the  unit  cost  for  over- 
head expenses)  is  the  object  sought  by  the  Premium  Plan  of  wage  payment, 
the  same  as  with  Piece  Rate  and  Differential  Rate  Plans. 

Bonus  Plan : 

The  basis  of  the  Bonus  Plan  is  a  daily  wage  for  a  specified  amount  of  pro- 
duct, and  a  Bonus  for  each  unit  produced  in  excess  of  th.e  specified  amount.  The 
Plan  is  closely  alHed  to  the  Premium  Plan. 

Task  Work.  With  a  Bonus — Gantz  System: 

The  special  features  of  this  system  are  the  setting  of  a  standard — or  task — 
which  is  to  be  undertaken  by  the  workman  at  day  rate  wages.  If  the  time  al- 
lowed for  the  task  is  (say)  3  hours,  the  workman  who  accomplished  it  in  3  hours 
or  less,  is  given  (say)  4  hours  pay.  If  the  workman  does  not  accomplish  the  task 
within  the  time  allowed  for  it  (the  standard  time)  he  receives  only  his  day  rate 
of  wage.  The  standard  time  plus  the  bonus  time  is  equivalent  to  a  piece  rate 
wage  plan  for  the  workmen  who  earn  the  bonus  time.  Workmen  who  do  not 
earn  bonus  time  are  paid  upon  the  day  rate  plan. 

(Lesson  Four) 


A  further  development  of  the  plan  provides  for  a  bonus  to  foremen  as  an  in- 
centive to  the  developing  of  inferior  w^orkmen  working  under  their  supervision. 
By  way  of  illustrating  this  feature,  a  foreman  supervising  20  men  might  be 
offered  8  cents  each,  or  $1.44,  if  18  of  the  men  earned  bonus  time,  or  10  cents 
each — $2.00 — if  all  the  men  earned  bonus  time.  Under  such  arrangement,  fore- 
men would  use  every  possible  effort  to  instruct  the  inferior  workmen  and  de- 
velop them  to  the  requisite  point  of  efficiency. 

FACTORY  ORDERS,  MATERIAL  REPORTS. 
Further  development  of  the  subjects. 

Factory  orders  and  Material  Reports  formed  the  subject  of  the  preceding 
lesson. 

These  subjects  are  so  vitally  important,  in  any  cost  accounting  system,  that 
we  deem  it  necessary  to  revert  to  them. 

The  explanations  and  exemplifications  given  in  the  preceding  lesson  were 
intended  to  demonstrate  the  purpose  for  which  a  factory  order  is  issued.  W| 
now  take  up  the  subject  in  a  more  g'eneral  way,  in  order  to  show  the  full  scope 
or  utility,  of  a  factory  order. 

(a)  The  simple  form  of  factory  order,  which  is  a  mere  notification  thai 

certain  product  is  to  be  manufactured,  is  adequate  only  when  very 
simpje  manufacturing  conditions  exist,  therefore,  the  factory — or 
production  order — is  to  be  considered  in  the  broader  way  in  which 
it  is  usually  used. 

(b)  The  form  of  a  factory  order  entirely  depends  upon  the  service  which  it 

is  to  render.  By  "form  of  order"  we  mean  the  design,  and  the  pro- 
visions necessary  for  presenting  instructions,  for  attaching  responsi- 
bility, and  for  showing  what  disposition  has  been  made  of  the  infor- 
mation shown  upon  the  order. 

(c)  The  orders  are  to  be  distinctive,  in  conformity  with  the  purposes  for 

which  they  are  issued.  A  factory  engaged  in  manufacturing  prod- 
uct for  special  orders,  and  in  manufacturing  a  standard  product 
would  require  distinctive  factory  (or  production)  orders  for  each 
class  of  product.  These,  again,  are  subject  to  the  various  sub- 
divisions under  which  standard  product  is  carried  upon  the  factory 
records — such  as — finished  product,  part  finished  product.  Finished 
parts,  etc. 

(d)  Distinctive  orders  are  required  in  the  following  cases: — 

(i)     When  defects  in  product  are  to  be  corrected. 

(2)  When  sub-production  orders  are  issued. 

(3)  When  the  construction  of  machinery,  for  factory  use  is  to  be 
undertaken  in  the  factory. 

(4)  When  any  part  of  the  Plant,  or  factory  equipment  is  to  be  im- 
proved by  work  done  in  the  factory. 

(5)  When  any  repair  work  to  Plant  or  equipment  is  to  be  done 
in  the  factory. 

The  foregoing  development  of  the  factory,  or  production  order,  justifies  the 
statement  that  it  is  a  very  important  adjunct  in  a  cost  accounting  system. 

MATERIAL  REPORTS. 

The  subject  of  Material  Reports,  as  in  the  case  of  factory  orders,  is  of  such 
importance  that  we  deem  it  advisable  to  again  take  it  up. 

6 

(Lesson  Four) 


The  correctness  of  merchandise  inventories  depends  very  largely  upon  the 
correctness  of  material  reports  with  respect  to  quantities  and  description  of 
materials  received  and  issued. 

Inaccuracies,  in  either  respect,  will  be  responsible  for  expenditures  of  time  in 
tracing  differences  which  ought  not  to  have  existed.  The  course  through  which 
material  reports  are  passed  should  be  thoroughly  understood  by  the  student. 
See  page  95  of  collateral  reading. 

QUESTIONS    FORMING    THE  FOURTH  EXAMINATION. 

1.  Briefly  define  the  purposes  for  which  a  factory  order  is  issued  for  factory 

production. 

2.  When  a  factory  is  largely  engaged  in  making  a  standard  product,  kept  in 

stock,  what  special  consideration  should  be  given  to  the  issuance  of  fac- 
tory orders  for  such  product,  with  respect  to  quantities  to  be  produced, 
and  for  what  purpose? 

3.  Admitting  the  necessity  for  reducing  clerical  work  as  much  as  possible, 

how  would  you  save  clerical  effort,  in  issuing  factory  orders,  in  case  a 
factory  was  engaged  in  producing,  say,  30  articles,  for  30  different  cus- 
tomers, the  30  articles  being  represented  by  3  different  kinds  only? 

4.  If  an  order  is  received  for  100  articles  complete,  and  each  article  is  repre- 

sented by  5  separately  manufactured  parts  how  would  you  order  the 
factory  to  proceed  with  the  requisite  production? 

5.  If  a  factory  constructs  machinery  for  its  own  use,  what  form  of  factory 

order  would  be  required  to  authorize  the  construction? 

6.  Suppose  a  factory  order  to  have  been  issued  for  the  laying  of  a  cement 

floor  in  the  store  room,  by  factory  employees,  no  other  prepared  flooring 
having  previously  existed.  How  would  the  cost  of  the  cement  floor  be 
accounted  for  in  the  general  accounts,  if  the  store  room  were  owned  by 
the  owner  of  the  Factory? 

7.     By  what  means  are  factory  orders,  and  the  various  forms  of  material 
reports,  traced,  and  accounted  for?     Explain  the  procedure. 

8.  Before  approving  purchase  Invoices  for  payment  what  procedure  should 

be  followed? 

9.  Explain  briefly,  but  sufficiently,  the  purpose  served  by  a  Bill  of  Materials. 

10.  In  view  of  the  fact  that  materials  are  not  issued  from  the  store  room 

except  as  requisitioned,  that  is,  upon  written  orders,  why  is  it  neces- 
sary to  also  have  a  Report  of  Material  used? 

11.  What  are  the  principal  disadvantages  of  the  day  rate  system  of  paying 

wages  ? 

12.  Name  some  of  the  indirect  (overhead)   expenses   which   would   naturally 

tend  to  increase  with  an  increased  production  realized  from  a  piece 
rate  system  of  wage  payment, 

13.  If  materials  or  supplies  are  issued  from  the  general  Store  Room  to  an 

operating  department,  for  use  as  needed,  how  are  the  materials  or  sup- 
plies to  be  accounted  for? 

14.  What  class  of  labor  is  the  day  rate  system  of  wage  payment  applicable 

to,  and  why? 

7 

(Lesson  Four) 


sldz'jll 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


FIFTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


FIFTH  LESSON 

SUBJECT:    LABOR  REPORTS. 

(Collateral  Reading,  Chapter  8.) 

The  purpose  served  by  Labor  Reports  is  that  of  providing  information  from 
which  labor  costs  may  be  ascertained.  This  apparently  simple  requirement  is 
found  to  be  much  more  complex  when  consideration  is  given  to  labor  classi- 
fication, and  the  various  conditions  which  will  determine  the  form  of  report 
to  be  used. 

The  classifications  commonly  required  for  labor  reports  are: 

(a)  Direct,  or  productive  labor,  that  is,  labor  directly  chargeable  to  the 

product. 

(b)  Indirect,  or  non-productive  labor,  that  is,  labor  expended  upon  work 

of  the  factory,  but  in  such  a  way  that  it  cannot  be  distinctly  allo- 
cated to  any  definite  part  of  the  product,  such  for  instance  as  the 
work  of  superintendents,  foreman,  factory  clerks,  etc.,  whose  work 
is  wholly  connected  with  the  entire  product  of  the  factory,  but  not 
distinctly  applicable  to  any  definite  part  of  it.  For  instance,  a  fore- 
man usually  supervises  a  shop  or  an  entire  department.  If  his  time 
is  not  fully  occupied  upon  the  production  of  a  single  order,  job,  or 
article  produced  in  the  shop  or  department,  his  time  must  be 
charged  against  all  the  orders,  jobs,  or  articles,  produced  in  the  shop 
or  department,  the  charge  to  be  borne  by  a  particular  order,  job, 
or  article,  being  a  pro-rata  share  of  the  total  charges. 

(c)  Labor  operations,  that  is,  direct  labor  expended  in  two  or  more  dis- 

tinctly separate  operations  before  a  product  is  completed. 

After  classification  has  been  determined,  consideration  must  be  given  to  the 
following  questions : 

(i)     Are  the  labor  reports  to  be  used  for  pay  roll  purposes? 

(2)  Are  they  to  be  used  for  cost  purposes? 

(3)  Are  they  to  answer  both  of  these  purposes? 

(4)  Are  they  to  be  made  daily,  or  at   a   time  which   conforms   to  the   cost 

period? 

(5)  Are  they  to  report  day  work? 

(6)  Are  they  to  report  piece-work? 

The  foregoing  does  not  enumerate  all  of  the  considerations  which  may  affect 
the  form  of  a  labor  report;  the  considerations  mentioned,  however,  will  apply 
in  the  majority  of  instances.  Others  will  arise  from  special  conditions  which 
attach  to  every  factory. 

A  well  planned  form  of  labor  report  will  provide  the  possibility  or  deter- 
mining the  labor  cost  of  an  order,  job,  article,  or  process,  or  of  any  distinctive 
part,  and  this  result  should  be  accomplished  with  a  minimum  amount  of  clerical 
detail.  Some  part  of  the  clerical  detail  must  be  performed  by  the  workmen, 
any  duties  imposed  upon  them  in  connection  with  the  reports,  however,  must 
not  involve  writing  or  computing,  which  it  is  possible  to  accomplish  by  other 
means,  and  the  demand  made  upon  their  time  must  not  be  excessive. 

•3 

(Lesson  Five) 


From  what  has  been  said  respecting  classification  and  conditions  which 
will  largely  determine  the  form  which  labor  reports  must  take,  the  student 
will  have  grasped  the  importance  of  preserving  to  the  fullest  possible  extent, 
the  relation  which  the  individual  report  must  at  all  times  bear  to  the  classifica- 
tion or  other  distinctive  feature,  of  which  it  is  a  part. 

Occasions  will  arise  which  require  great  care  in  ensuring  the  application 
of  labor  costs  to  the  proper  classification.  For  instance,  a  workman  may  work 
partly  at  day  rate,  and  partly  at  piece  rate  production  during  the  period 
covered  by  his  labor  report.  If  separate  reports  are  not  made,  his  report  must 
designate  the  two  classifications  with  sufficient  distinctness  to  ensure  the 
charges  being  made  to  the  proper  classification. 

The  necessity  for  accuracy  of  labor  reports  cannot  be  too  strongly  urged. 
Inaccuracy  in  the  reports  will  falsify  the  labor  costs.  As  an  instance, 
suppose  a  workman  to  have  worked  5  hours  on  order  number  987, 
and  3  hours  on  order  789.  If  he  misapplies  his  time  to  the  respective  orders, 
by  charging  5  hours  to  order  number  789  and  3  hours  to  order  number  987, 
incorrect  labor  costs  will  be  shown  for  both  orders.  The  labor  report,  how- 
ever, will  show  that  the  workman  accounted  for  his  full  days  work  of  8  hours. 
The  possibility  of  inaccuracies  of  this  nature  are  reduced  by  requiring  the  labor 
report  to  show  a  description  of  the  work  done. 

The  methods  to  be  employed  in  obtaining  labor  costs,  will  be  largely  de- 
cided by  a  consideration  of  the  following  requirements. 

(a)  The  greatest  possible  degree  of  accuracy. 

(b)  The  reporting  workman  must  not  be  required  to  devote  an  excessive 

amount  of  time  to  the  making  out  of  his  report. 

(c)  The  reports  must  be  free  from  uncertainties. 

If  workmen  are  individually  engaged  upon  several  jobs  during  a  day,  loss 
of  time  and  inaccuracies  would  certainly  result  if  they  were  required  to  report 
their  time.  Under  such  conditions,  it  is  the  practice  of  foremen  to  assign  to 
each  workman  several  jobs  ahead,  the  assignments  being  kept  upon  a  spindle 
by  the  workman.  When  work  is  commenced,  the  assignment  is  stamped  by  the 
workman  (a  time  stamp  being  used  for  the  purpose)  and  placed  upon  a  second 
spindle  pending  its  completion.  When  completed,  the  assignment  is  again 
stamped,  by  the  workman,  with  the  ending  time,  and  transferred  to  a  spindle 
used  for  completed  assignments.  The  completed  assignments  are  collected 
from  the  spindle  by  a  factory  clerk,  who  uses  them  as  the  basis  for  making 
up  the  labor  reports.  This  procedure  minimizes  the  possibility  of  loss  of  time 
and  inaccuracies. 

The  workman  does  not  lose  time  waiting  for  instructions,  the  foreman  pro- 
viding ahead  of  the  workman's  requirements.  Reporting  time,  by  the  work- 
man, is  confined  to  the  instantaneous  process  of  stamping  the  work  order, 
which  also  eliminates  inaccuracies,  and  noting  the  time  oflf  for  mid-day  meal, 
or  for  any  other  purpose. 

As  in  the  case  of  material  reports.  Labor  Reports  are  to  be  numbered,  col- 
lected, examined,  priced,  calculated,  the  accounts  to  be  charged  and  credited 
are  to  be  indicated,  they  are  to  be  posted  to  the  relating  records,  and  they  are 
to  be  properly  filed. 

Labor  Reports,  when  used  for  pay-roll  purposes,  must  show  the  date,  work- 
man's number,  his  name,  the  department  with  which  he  is  connected,  the  opera- 
tion, upon  which  he  was  engaged,  his  time,  and  the  rate  and  amount  of  his 
wages. 

4 

(Lesson  Five) 


For  the  purpose  of  ascertaining  Costs,  Labor  Reports  must  show  the  order 
number,  description  of  work,  quantity  accomplished,  time  consumed,  rate  and 
amount  of  wages,  the  department  operation,  occupation  of  the  workman,  and 
the  necessary  record  of  any  machine  which  may  have  been  specially  operated 
in  connection  with  his  work. 

QUESTIONS  AND  PROBLEMS  FORMING  THE  FIFTH 

EXAMINATION. 

The  subject  of  Labor  Reports  is  so  important,  in  any  Cost  System,  that  we 
confine  this  examination  to  the  subject. 

Each  question  given  may  be  properly  answered  if  Chapter  8  of  the  col- 
lateral reading  has  been  thoroughly  understood  by  the  student. 

1.  (Problem)     Prepare  a  form  of  Labor  Report,  in  each  case,  which  will 
properly  record  the  following  details  under  date  of  January  2,  1920. 

(a)  John   Smith,    Moulder,    employee   No.   20,   in    Foundry   Department 

worked  3  hours  on  job  No.  1720,  for  a  brass  casting.  His  wage  rate 
is  $4.80  per  day  of  8  hours.  Harry  Brandt  is  foreman  of  the  depart- 
ment. 

(b)  James   Bell,  Machinery  Oiler,  employee  No.   126,  in  Department  C, 

worked  3  hours  in  Department  C,  and  5  hours  in  Department  A. 
His  work  in  Department  A  was  temporary  only,  the  regular  oiler 
being  absent.  His  wage  rate  is  $3.00  per  day  of  8  hours.  W.  Good 
is  foreman  of  Department  C,  and  S.  Glass  is  foreman  of  Depart- 
ment A. 

(c)  Hugo  Jones,  Hose  Tester,  employee  No.  58,  in  Department  B  worked 

full  day  of  8  hours,  and  tested  3000  feet  of  No.  9  Garden  Hose,  50 
lengths.  His  wage  rate  is  45^c  per  length.  He  used  Compressor 
No.  3.     Inspector  for  the  Department  is  Charles  Slater. 

2.  In  the  case  of  (b)  above,  prepare  what  you  consider  a  proper  notification 

of  the  transfer  of  James  Bell  from  Department  C,  to  Department  A. 

3.  Briefly  give  your  reasons  for  the  notification  you  consider  is  necessary 

under  (b). 

4.  What  records  are  necessary  in  the  payroll  department  for  the  purpose 

of  pricing  labor  reports? 


{Lesson  Five) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


SIXTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


"^1/ 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


SIXTH  LESSON 

SUBJECTS:  APPLICATION  OF  OVERHEAD  (INDIRECT  EXPENSES) 

TO  DEPARTMENTS. 

Charges  for  depreciation  and  maintenance. 

(Collateral  reading  chapters  9  and  10.) 

Preceding  lessons  have  dealt  with  the  elements  of  cost,  methods  of  cost- 
finding,  the  philosophy  of  department  and  product  classification,  the  various 
forms  of  orders  required  for  authorizing  product,  and  forms  of  reports  for  re- 
porting material  used,  and  labor  expended  upon  the  product.  These  are  direct 
costs. 

Following  the  natural  order  of  progression,  we  may  now  present  the  subject 
of  Indirect,  or  Overhead  costs. 

APPLICATION  OF  INDIRECT  (OVERHEAD)  COSTS  TO  DEPART- 
MENTS: 

All  costs  which  cannot  be  distinctly  identified  as  having  been  incurred  for 
the  sole  benefit  of  a  given  order,  job,  or  article,  will  be  chargeable  against  any 
aggregation  of  orders,  jobs,  or  articles  which  may  have  been  solely  benefited  by 
the  costs.  Such  an  aggregation  may  be  represented  by  an  operation,  process, 
department,  or  if  the  indirect  costs  relate  to  the  factory  as  a  whole,  the  aggre- 
gation would  be  represented  by  the  entire  factory  product. 

When  costs  cannot  be  applied  directly  to  the  product,  they  must  be  applied 
to  the  product  upon  a  basis — more  or  less  arbitrary — as  nearly  approaching 
their  actual  incidence  as  may  be  possible. 

Our  present  object  is  to  indicate  the  methods  which  must  be  employed  for 
reducing  the  amount  of  indirect  expenses,  which  are  to  be  arbitrarily  charged 
against  product,  by  applying  as  much  of  such  expenses  as  may  be  possible  to  the 
product  which  solely  benefits  by  them.  It  may  be  taken  as  an  axiom,  that  the 
value  of  a  Cost  System  is  measurable  by  the  small  proportion  of  manufacturing 
expenses  which  the  System  recognizes  as,  "General  Factory  Overhead"  for  ar- 
bitrary distribution  over  the  entire  factory  product.  True  Costs  are  the  actual 
costs,  therefore,  in  the  interest  of  true  costs,  no  reasonable  eflfort  should  be 
spared  in  determining  the  extent  to  which  an  indirect  cost  may  be  applied  as 
solely  benefiting  any  departmental  division  of  a  factory.  By  reasonable  effort, 
we  mean  an  eflfort  commensurate  with  the  result  to  be  obtained,  that  is,  the 
importance  of  the  result  must  warrant  the 'clerical  details  required  for  its  at- 
tainment. 

The  application  of  Overhead  to  departments  exclusively  benefiting  by  the 
overhead  expense,  will  be  understood  from  the  following  illustration. 

If  there  are  five  operating  departments  in  a  factory  and  a  superintendent 
is  employed  to  devote  his  entire  time  to  the  supervision  of  four  of  the  depart- 
ments, it  would  clearly  be  improper  to  charge  any  part  of  his  salary  to  the  de- 
partment with  which  he  was  not  connected.  The  four  departments  supervised 
by  him  must  bear  the  entire  expense.     It  may  not  be  practicable  to  charge  his 

-3 

{Lesson  Six) 


time  to  the  four  departments  from  a  time  report,  that  is,  a  report  of  his  daily- 
time  devoted  to  each  department,  or  to  satisfactorily  apportion  his  salary  upon 
a  basis  of  the  demands  made  upon  his  time  by  each  one  of  the  four  departments, 
but,  there  is  absolute  certainty  that  the  four  departments  absorb  his  entire  time, 
therefore,  an  arbitrary  application  of  his  time  is  confined  to  the  product  of  the 
four  departments,  this  limitation  bringing  the  cost  of  supervision  nearer  to  true 
costs  than  w^ould  be  the  case  if  dealt  with  in  any  other  manner. 

There  are  indirect,  or  overhead,  expenses  in  all  manufacturing  businesses 
M^hich  a  superficial  consideration  would  class  as  General  Overhead,  or  overhead 
requiring  distribution  over  the  entire  product  of  the  factory.  Upon  careful  con- 
sideration however,  it  will  be  seen  that  such  expenses  may  be  resolved  into  de- 
partmental overhead  with  a  degree  of  accuracy  that  is  much  nearer  true  Cost 
than  would  be  the  case  if  the  expenses  were  distributed  as  General  Overhead. 

The  following  are  instances  of  the  expenses  referred  to : 

Rent: 

May  be  directly  allocated  to  department  classification  on  the  basis  of  floor 
space  occupied  by  each.  Suppose  for  instance  that  an  annual  rent  of  $8,ooo.cxD 
is  paid  under  a  lease  taken  by  an  iron  working  plant,  the  lease  covering  property 
having  an  area  of  600,000  square  feet.  We  will  assume  the  machine  shop  of 
the  plant  requires  and  uses  an  area  of  100,000  square  feet.  Obviously,  as  the 
Machine  Shop  occupies  and  uses  1/6  of  the  entire  leased  space,  it  is  chargeable 
(other  considerations  being  equal)  with  1/6  of  the  annual  rent,  or  $1,333.33. 
Again  it  is  possible  to  equitably  distribute  the  machine  shops  annual  rental  of 
$1,333.33  to  each  distinctive  operation  carried  on  in  the  shop,  and  upon  the  same 
basis.  For  instance,  a  boring  machine,  or  a  lathe  occupying  and  requiring  200 
square  feet  (other  considerations  being  equal)  would  be  chargeable  with  an 
amount  of  the  annual  rent  equal  to  $2.66.  In  this  connection,  the  Boring  Ma- 
chine, or  Lathe,  would  be  classified  as  an  operation.  It  will  now  be  clear  that 
the  entire  annual  rent  of  $8,000.00  may  be  equitably  distributed  to  the  various 
department  classifications  of  the  plant,  to  the  end  that  no  part  of  it  is  depart- 
mentally  unaccounted  for.  Such  a  distribution  of  the  annual  rent  would  be  much 
nearer  true  costs  for  rent  than  could  be  obtained  by  any  plan  of  general  distri- 
bution. 

Insurance,  Fire  and  Liability: 

Insurance  may  be  directly  charged  to  departments  on  the  basis  of  property 
values  covered — in  the  case  of  fire  insurance — and  average  amount  of  pay-roll  in 
the  case  of  Liability  insurance. 

Depreciation: 

May  be  directly  charged  to  departments  on  the  basis  of  the  provision  made 
for  the  property  in  each. 

Real  Estate  Taxes: 

May  be  dealt  with  upon  the  same  basis  as  rent. 

Property  Taxes: 

May  be  directly  charged  to  departments  upon  the  basis  of  the  taxable  prop- 
erty values  in  each. 

The  foregoing  expenses  of  a  generally  indirect  character  are  particularized 
for  the  purpose  of  illustrating  the  principle  that  in  the  interest  of  true  costs,  the 

r 

4 

{Lesson  Six) 


incidence  of  indirect  charges  should  fall  upon  the  product  in  proportion  to  the 
benefit  it  receives  therefrom  .  Other  expenses  such  as  Power,  Heat,  Light,  etc. 
are  subject  to  departmental  distribution  as  direct  expenses. 

Fluctuations  in  Overhead  Charges: 

One  of  the  important  services  to  be  rendered  by  a  cost  system  is  the  pre- 
sentation of  costs  sufficiently  a,nalyzed  for  the  purpose  of  enabling  comparisons 
to  be  made  of  each  element  of  cost,  as  between  one  cost  period  and  another.  If 
fluctuations  in  overhead  charges  are  permitted,  which  do  not  in  reality  exist,  the 
value  of  comparisons  is  destroyed. 

If,  for  instance,  periodic  expenditures  are  made  in  advance,  or  in  arrears, 
and  the  expenditures  are  for  the  benefit  of  a  period  not  wholly  represented  by 
the  cost  period  in  which  they  fall,  the  expenditures  should  be  apportioned  to 
the  periods  for  which  they  were  made.  Thus,  if  a  cost  period  is  represented 
by  a  calendar  month  and  rent — $1,500.00 —  is  paid  quarterly  in  advance,  or  in 
arrear,  $500.00  would  be  the  proper  proportion  to  charge  to  the  costs  of  each 
cost  period  for  the  quarter.  If  the  ren  were  paid  in  advance,  the  $1,500.00  paid 
for  3  months  in  advance  should  be  charged  to  "Prepaid  Rent,"  $500.00  being 
credited  to  "Prepaid  Rent"  and  charged  to  "Rent"  at  the  end  of  each  cost  period. 
If  the  rent  were  payable  3  months  in  arrears,  "Rent"  should  be  charged  with 
$500.00  each  month  and  credited  to  "Reserve  for  Accrued  Rent,"  or  to  the 
Lessor  as  a  creditor.  In  this  manner  the  costs  of  each  month,  or  cost  period, 
would  bear  their  actual  proportion  of  the  rental  charge.  The  student  will  per- 
ceive the  inaccuracy  which  would  result  from  charging  the  entire  rent — $1500.00 
— to  the  cost  period  in  which  it  was  paid.  Two  cost  periods  would  escape 
any  charge,  and  one  cost  period  would  bear  the  entire  charge. 

Departmental  Supplies: 

Supplies,  such  as  Oils,  Grease,  Waste,  Small  Tools,  etc.,  are  usually  requisi- 
tioned in  more  or  less  bulk,  that  is,  the  precise  quantity  required  for  any  par- 
ticular job  being  unascertainable,  a  quantity  is  called  for  to  be  used  as  needed. 
As  in  the  case  of  rent,  referred  to  above — if  the  supplies  were  charged  to  the 
cost  period  in  which  they  were  requisitioned,  and  a  part  remained  unused,  that 
particular  cost  period  would  bear  an  expense  which  was  properly  applicable  to 
a  subsequent  period. 

Fluctuations  of  this  nature  are  prevented  by  charging  the  supplies  to  a  de- 
partment sub-store  room,  which  should  receive  credit  at  the  end  of  each  cost 
period,  for  the  quantities  issued  on  department  requisitions  during  the  cost 
period,  charge  being  made  to  the  current  costs  of  the  department.  The  balances 
shown  by  the  account  with  the  department  sub-store-room  would  represent 
the  inventory  of  supplies  on  hand  unused.  If  the  book  inventory  and  physical 
inventory  were  not  in  reasonable  agreement  with  each  other,  an  investigation 
would  probably  show  that  the  estimates  of  the  supplies  used  required  revising. 

Fluctuations  may  be  caused  by  variations  in  the  volume  of  product  turned 
out  during  diflferent  cost  periods.  Such  causes  are  the  outcome  of  business  con- 
ditions which  may  not  be  preventable,  but,  a  properly  conducted  cost  system 
will  unerringly  indicate  the  cause  and  its  effect.  This  is  another  very  import- 
ant function  of  cost  accounting. 

Distribution  of  Overhead: 

From  what  we  have  said  upon  the  subject  of  applying  Overhead  charges,  it 
naturally  follows  that  the  distribution  of  overhead  should  take  the  following 
course: 

5 

(Lesson  Six) 


(a)  Overhead  directly  assigned  to  a  productive  department  should  be  dis- 

tributed over  the  product  of  that  department. 

(b)  Overhead  directly  assigned  to  non-productive,  or  Indirect  departments, 

should,  together  with  the  direct  cost  of  such  departments,  be  distrib- 
uted over  the  product  of  the  productive  departments. 

(c)  Factory  Overhead  of  a  general  character,  applicable  to  the  factory  as 

a  whole,  should  be  distributed  over  the  productive  departments. 

The  methods  used  for  accomplishing  the  distribution  will  form  the  subject 
of  a  future  lesson. 

Charges  for  Depreciation  and  Maintenance: 

The  determining  of  a  proper  depreciation  rate,  to  be  applied  to  any  wasting 
asset,  depends  upon  the  period  during  which  the  Asset  may  continue  to  use- 
fully perform  its  function.  The  period  of  continued  usefulness  depends  entirely 
upon  the  conditions  under  which  it  is  used,  and  the  probabilities  with  respect 
to  its  retirement  from  service  by  reason  of  improved  devices  for  doing  the  work 
to  greater  advantage.  Our  representation  respecting  fluctuations  in  Overhead 
expenses  are  applicable  with  equal  force  to  depreciation  and  maintenance. 

By  way  of  illustration,  suppose  new  machinery  to  be  installed  in  a  factory, 
and  operated  say  two  years  before  any  maintenance  expense  were  incurred, 
and  that  at  the  end  of  the  two  years  a  repair  costing  $500.00  was  necessary.  If 
no  provision  for  repairs  were  made  during  the  two  years,  the  product  of  the 
factory  during  the  two  years  escaped  any  cost  for  repairs,  although  each  day's 
work  done  by  the  machinery  contributed  to  the  wear  and  tear  which  ultimately 
involved  a  repair  costing  $500.00.  This  presents  another  case  which  required 
an  estimated  charge,  as  the  probable  expense  of  maintenance,  for  each  cost 
period,  from  the  installation  of  the  new  machinery  to  the  time  at  which  repairs 
would  probably  be  required,  such  estimated  charge  being  offset  by  credit  to 
a  "Reserve  for  Maintenance,"  the  actual  cost  of  the  repair  ($500.00)  being 
charged  to  the  above  stated  reserve.  Any  appreciable  difference  between  the 
reserve  and  the  actual  cost  would  be  the  subject  of  investigation  and  adjust- 
ment. 

QUESTIONS  FORMING  THE  SIXTH  EXAMINATION. 

1.  Give  a  sub-division  of  the  three  elements  of  cost,  and  give  an  illustration 

of  each. 

2.  Give  classifications  for  each  one  of  the  following  expenditures  which  have 

entered  into  the  construction  of  a  Tool  Box,  and  state  how  the  import 
charges  under  (d)  would  be  dealt  with  upon  the  records: 

(a)  Lumber 

(b)  Hinges  and  Handles 

(c)  Lock  (Imported) 

The  application  of  cost  to  each  unit 

(e)  Varnish  )  manufactured  is  not  satisfactorily  deter- 

(f)  Screws  and  Nails  /  minable, 

3.  Referring  to  question  No.  2,  how  would  the  labor  for  operations  (e)  and 

(f)  be  classified? 

4.  If  A,  B,  C,  D,  represent  the  manufacturing  departments  of  a  factory,  state 

how  the  following  expenses  should  be  charged? 
(a)     Wages  of  clerk  employed  in  A  and  B. 

6 

(Lesson  Six) 


The  application  of  cost  to  each  unit 
manufactured  is  satisfactorily  determin- 
'able. 


(b)  Wages  of  foremen  (one  in  each  department). 

(c)  Wages  of  superintendent  (supervises  all  departments). 

(d)  Packing  expenses — incurred  solely  for  the  product  of  A  and  B,  the 
product  being  regularly  packed  and  stored  as  finished  product. 

(e)  Packing  Expense — incurred  solely  for  the  product  of  C  and  D,  the 
product  being  packed  when  ordered  for  shipment. 

5.  Are  factory  costs  affected  by: 

(a)  Trade  discounts  deducted  from  purchase  invoices? 

(b)  Allowances  deducted  from  sales  invoices? 

(c)  Rebates  received  upon  purchases? 

(d)  Cash  discounts  allowed  for  payment  of  purchase  invoices? 
Give  reasons  for  your  answer  in  each  case. 

6.  If  an  order  is  received  for  100  articles,  each  article  requiring  special  produc- 

tion, what  method  of  cost-finding  would  be  applicable,  and  why? 

7.  State  the  method  of  cost-finding  applicable  if  50  similar  articles,  and  50 

dissimilar  articles  are  ordered.     None,  however,  are  standard  product  of 
the  factory. 

8.  If  50  similar  articles  are  ordered  (not  standard  product)  and  50  articles  are 

ordered  (standard  product),  what  method  of  cost-finding  is  applicable 
and  why? 

9.  Classify — as  to  productive,  non-productive,  or  miscellaneous — the  follow- 

ing departments  of  a  metal  working  plant : 

(a)  Foundry  Department. 

(b)  Purchasing  Department. 

(c)  Pattern-making  Department,  if  all  patterns  are  made  for  special 
orders  which  will  not  be  repeated. 

(d)  If  patterns  are  for  special  orders  from  customers,  who  may  repeat 
them? 

(e)  If  patterns  for  special  orders  are  made,  and  patterns  for  standard 
factory  product  are  made. 

10.  What  advantage  is  to  be  derived  from  classifying  the  product  of  a  factory? 

11.  Is  the  material  requisition  always  a  satisfactory  record  from  which  to 

charge  material  costs  for: 

(a)  A  definite  order,  or  article? 

(b)  A  process. 

(c)  If  not — give  reasons  and  explain  how  the  material  costs  would  be 
ascertained. 

12.  What  information  must  a  factory  order  show,  if  it  is  to  be  used  for  the 

following  purposes : 

(i)  Factory  order  and  material  requisition? 

(2)  Factory  order  and  instructions  to  foreman? 

(3)  Factory  order  and  Labor  Report? 

(4)  Factory  order  and  Production  Report? 

(5)  Factory  Order  and  Shipping  Record? 

(6)  Factory  Order  and  Cost  Sheet? 

13.  If  materials  are  issued  from  the  General  Store-room  to  Department  A  in 

bulk,  for  use  as  needed,  how  would  the  transaction  be  recorded? 

7 

(Lesson  Six) 


(a)  Upon  the  General  Store-room  records? 

(b)  Upon  the  Records  of  Department  A? 

(c)  If  Department  A  transfers  part  of  the  Materials  to  Department  B, 
what  records  would  be  required? 

14.  To  what  class  of  labor  is  a  day-rate  of  wage  payment  applicable? 

15.  Describe  the  connection  which  exists  between  Labor  Reports,  Pay  Rolls, 

and  the  labor  costs  of  Cost  records. 

16.  What  must  a  Labor  Report  show  in  order  that  it  may  be  used  for: 

(i)     Pay  Roll  purposes? 
(2)     Cost  purposes? 

17.  What  do  you  understand  to  be  the  meaning  of  "Indirect"  charges  or  "Over- 

head?" 

18.  What  principle  must  be  followed  in  apportioning  Indirect  charges  as  they 

occur? 


8 

(Lesson  Six) 


ANSWERS  TO  QUESTIONS  FORMING  THE  NINTH  EXAMINATION. 

1.  The  disadvantages  experienced  by  the  management  are,  that  no  proof 

of  accuracy  exists,  and  the  guidance  of  proper  classifications  is  lacking. 
(Collateral  reading,  Chapter  i6.) 

2.  The  term  "Cost  period"  means  an  equal  fractional  part  into  which  the 

calendar  year  is  divided  for  the  purpose  of  ascertaining  costs  at  stated 
times  during  the  year.  The  best  duration  for  a  cost  period  is  the  period 
covered  by  the  Pay-roll.     (Collateral  reading.  Chapter  i6.) 

3.  The  principal  feature  of  difference   between  a  Purchase  Record   and   a 
Voucher  Register  are: 


'ts' 


(i)  The  purchase  Record  requires  the  use  of  a  ledger  for  the  accounts 
of  creditors,  to  which  each  purchase  is  posted.  The  Voucher 
Register  provides  for  details  which  show  the  payment  of  each 
purchase.  Unpaid  purchases  are  therefore  indicated  by  the 
open  items,  which  virtually  represent  a  creditors  ledger,  as  to 
amounts  outstanding,  unpaid.    (Collateral  reading  Chapter  16.) 

4.  A  Distribution  Record  would  be  necessary  when  the  impersonal  accounts 

are  too  numerous  to  be  conveniently  provided  for  on  the  Purchase  Rec- 
ord or  Voucher  Register.     (Collateral  reading  chapter  16.) 

5.  The  total  of  each  column  of  the  Distribution  Record  would  be  posted  to 

the  account  indicated  by  the  caption  of  the  column.  Collateral  reading, 
chapter  16.) 

6.  An  analysis  of  the  Pay  Roll  would  be  required  when  the  pay-roll  is  used, 

for  wage  payment  only.  In  this  event,  the  pay-roll  would  deal  only 
with  the  wages  due  to  each  workman  and  the  total  wages  paid.  (Collat- 
eral reading,  chapter  16.) 

7.  The  purpose  of  a  Pay  Roll  analysis  is  to  ascertain  the  amount  of  wages 

paid  for  each  factory  department,  and  the  respective  amounts  paid  for 
direct  and  indirect  labor.  The  details  are  required  in  order  that  the  ap- 
propriate accounts  may  be  charged.     (Collateral  reading,  chapter  16.) 

8.  The  cost  sheets  of  uncompleted  work  taken  collectively  show  the  invent- 

ory of  Work  in  Process.     (Collateral  reading,  chapter  16.) 

9.  The  agreement  is  effected  only  at  a  particular  time  which  is  at  the  end 

of  a  cost  period,  when  the  details  have  been  collected  upon  summariz- 
ing records.     (Collateral  reading,  Chapter  16.) 

10.  The  cash  advance  of  $350.00  would  be  entered  in  the  miscellaneous  column 

of  the  Purchase  Register,  as  a  charge  against  the  company.  (Collateral 
reading.  Chapter  16.) 

11.  The   $350.00  would   be    entered    in    the   "Miscellaneous   column"   of   the 

Voucher  Register,  as  a  charge  against  the  company.  (Collateral  reading, 
Chapter  16.) 

12.  (i)     The  $120.00  would  be  entered  in  the  miscellaneous  column  of  the 

Purchase  Record,  as  a  charge   against   selling  expenses.      In    the 
voucher  register  it  would  be  entered  in  the  column  headed  "Selling 
expenses." 
(2)     The  $50.00  would  be  entered  in  the  column  headed  "Administrative 
Expenses"  in  the  Purchase  Record,  and  in  the  Voucher  Register. 

9 

(Lesson  Nine) 


(3)  The  $30.00  would  be  entered  in  the  "Miscellaneous  column"  of  the 

Purchase  Record,  as  a  charge  against  supplies.     In   the  voucher 
register  it  would  be  entered  in  the  column  headed  "supplies." 

(4)  The  $875.00  would  be  entered  in  the  column  headed  "Raw  Materials" 

in  the  Purchase  Record,  and  in  the  Voucher  Record.     (Collateral 
reading.  Chapter  16.) 

13.  A  further  distribution  would  be  made  in  a  Distribution  Record,  which 
would  provide  a  separate  column  for  each  required  classification.  (Col- 
lateral reading,  Chapter  16.) 


10 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


SEVENTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


h, i. 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


SEVENTH  LESSON 

SUBJECTS:    DISTRIBUTION  OF  FACTORY  OVERHEAD— FACTORY 

OVERHEAD  REPORTS. 

(Collateral  reading,  chapters  ii  and  12.) 

The  preceding  lesson  dealt  with  the  subject  of  departmental  application  of 
overhead. 

The  distribution  of  Overhead  to  the  product  is  the  next  subject  to  be  con- 
sidered. 

The  fact  that  overhead  charges  require  distribution,  implies  the  im- 
'possibility  of  charging  them  to  the  product  in  an  exact  manner.  A  method, 
more  or  less  arbitrary,  must  be  employed,  v\^hich  will  give  the  nearest  approx- 
imation to  exactness.  In  deciding  upon  the  method  to  be  used,  considerations 
of  simplicity,  or  saving  of  clerical  effort  should  not  be  deciding  factors. 

Whatever  method  is  used,  it  must  conform  to  the  particular  conditions  of 
the  business  to  which  it  is  applied. 

The  methods  commonly  employed  for  distributing  overhead,  are  as  follows: 

Prime  Cost  Method  of  Distribution: 

The  prime  cost  method  of  distributing  overhead  is  based  upon  a  contingent 
relationship  existing  between  the  overhead  expense,  and  the  total  cost  of  direct 
material  and  direct  labor.  The  philosophy  of  the  method  requires  that  direct 
material  and  direct  labor  costs  are  invariable  as  to  amounts,  and  as  to  their  pro- 
portions one  to  the  other.  The  requisite  conditions  are  so  rare  in  any  factory 
that  the  method  may  be  said  to  be  of  negligible  importance. 

Productive  Labor  Cost  Method  of  Distribution: 

The  productive  labor  cost  method  of  distribution  is  applicable  only  in  cases 
where  labor  is  the  dominant  cost,  and  where  the  product,  time  expended 
upon  the  product,  and  the  wages  paid  are  uniform.  These  conditions  may  exist 
in  a  department,  but  rarely  throughout  all  the  departments  of  a  factory. 

Both  of  the  methods  considered  above  are  percentage  methods.  They  are 
respectively  operated  by  ascertaining  the  direct  material  and  labor  costs  (prime 
cost  method)  or  the  productive  labor  costs,  and  to  these  costs  is  added  a  per- 
centage, based  upon  previous  experience,  which  is  estimated  to  absorb  the 
overhead  expense  for  any  cost  period. 

Productive  Labor  Hours  Method  of  Distribution: 

The  productive  labor  hours  method  of  distributing  overhead  has  a  greater 
range  of  utility  than  the  percentage  methods  above  referred  to.  The  plan  is 
based  upon  time  only,  and,  to  a  very  great  extent  the  overhead  expenses  of  a 
factory  accrue  on  the  same  basis — time.  Rent,  Insurance,  Depreciation,  Re- 
pairs, Light,  Heat  and  Power,  for  instance,  constitute  the  most  important  part 
of  factory  overhead,  and  all  of  these  expenses  are  measured  by  time. 

3 

(Lesson  Seven) 


Machine  Rate  Methods  of  Distribution: 

There  are  a  variety  of  these  methods  for  distributing  overhead.  In  a  gen- 
eral way,  the  object  of  each  is  to  charge  to  each  machine,  or  process,  any 
definitely  assignable  expense,  together  with  a  proportion  of  the  departmental 
overhead  (including  the  department's  proportion  of  general  factory  overhead) 
to  which  is  added  the  direct  labor  cost  of  operating  the  machine. 

The  total  cost  of  operating  the  machine,  thus  obtained,  furnishes  a  basis  for 
computing  the  hourly  cost,  which  is  applied  to  all  product  operated  upon  by 
the  machine  for  the  number  of  hours  consumed  by  the  operation. 

Machine  rate  methods  are  applicable  only  to  machine  operations.  They 
will  give  a  nearer  approximation  to  true  costs  by  reason  of  the  absorbing  of 
costs   as   direct   costs — which   otherwise  would  be  classed  as  overhead. 

Use  of  Formulas : 

The  Student  should  use  formulas  for  mathematically  expressing  the 
relation  of  each  quantity  or  amount  which  enters  into  a  computation  for  the" 
distribution  of  overhead.  Entries  upon  factory  records  should  show  the  form- 
ulas under  which  distributions  have  been  made.  By  this  means,  explanation 
is  immediately  apparent,  whereas  a  written  explanation  would  involve  consid- 
erable trouble  and  would  not  be  nearly  as  effective.  The  advantages  of  a  form- 
ula is  shown  by  the  following:  lotno- 

Machine  No.  lo  (Department  B). 


Operating  Labor  Cost  $200.00 
Applicable  Overhead  50.00      $250.00 


.16-2/3  hourly  machine  rate 


Operating  machine  hrs.    1500 

Factory  Overhead  Reports: 

From  what  has  been  said  respecting  overhead,  its  application  and  distribu- 
tion, it  will  be  evident  that  a  system  must  exist  for  collecting  and  reporting  the 
overhead  expenses.  It  will  also  be  evident  that  overhead  expenses  must  be 
clearly  indicated  as  such  upon  all  the  records  of  a  factory  in  order  that  they  may 
be  properly  reported. 

The  methods  employed  for  collecting  all  factory  costs,  direct  and  indirect, 
will  be  the  subject  of  a  future  lesson.  The  records  used  for  the  purpose — known 
as  summarizing  records — will  collect  the  overhead  costs,  and  the  direct  material 
and  direct  labor  costs  at  the  same  time  for  each  cost  period.  The  student  will 
here  pereceive  that  the  accuracy  of  the  summarizing  records  will  depend  upon  the 
care  with  which  the  costs  are  expressed  upon  the  various  factory  records  and 
reports  from  which  the  costs  are  summarized. 

The  records  and  reports  from  which  overhead  charges  are  usually  obtained, 
are  as  follows: 

Purchase  Record:  For  indirect  material  and  supplies  which  have  been 
purchased  for  a  particular  department  and  delivered  to  the  department  without 
passing  through  the  general  store  room.  If  such  purchases  are  in  bulk,  that 
is,  if  they  are  in  excess  of  requirements  for  a  current  cost  period,  the  amounts 
actually  used  during  the  cost  period — as  shown  by  requisitions  issued  within 
the  department — would  be  the  amounts  to  be  charged  in  respect  of  the  period. 

Material  Requisitions  and  Reports  of  Materials  Used:  For  indirect  ma- 
terials and  supplies,  requisitioned  from  the  general  store  room,  or  from  depart- 

4 

(Lesson  Seven) 


ment  sub-store  rooms,  the  materials  would  usually  be  such  as  are  used  in  small 
and  variable  quantities  which  cannot  be  satisfactorily  charged  to  the  product 
directly,  such  as,  wire  nails,  screws,  small  tools,  scrap  material,  etc.  The  sup- 
plies would  include  machine  oil,  g"rease,  waste,  etc. 

Labor  Reports  or  Pay  Roll :  For  indirect  labor,  such  as,  work  of  superin- 
tendents, foreman,  factory  clerks,  truckers,  etc.,  etc.,  who  do  not  work  directly 
upon  the  product.  If  the  payroll  is  comp  etely  classified  as  to  productive  and  non- 
productive (or  indirect)  labor,  and  also  as  to  departments,  it  will  present  the 
necessary  details  for  ascertaining-  the  overhead  represented  by  indirect  labor.  If 
the  pay-roll  is  not  so  classified,  the  details  must  be  obtained  from  the  labor 
reports. 

Reports  Showing  Fixed  Charges  and    Other    General    Factory    Overhead: 

These  reports,  or  schedules  show  the  amount  chargeable  to  each  cost  period  for 
its  proportion  of  expenses,  which  are  of  a  more  or  less  fixed  character,  such 
as  Rent,  Insurance,  etc.,  etc.,  and  for  variable  expenses  which  bear  upon  the 
factory  generally,  such  as  Power,  Light,  and  Heat. 

Cost  Sheets:     For  costs  of  maintenance,  repairs  and  renewals. 

Special  Factory  Reports:  For  indirect  costs  in  connection  with  defective 
and  experimental  work,  over  short  and  damage,  inward  freight  and  cartage, 
etc.,  etc. 

The  variety  of  the  sources  from  which  overhead  expenses  are  collected, 
furnishes  a  very  strong  reason  for  insisting  that  the  greatest  possible  degree 
of  care  must  be  exercised  in  distinctively  distinguishing  direct  and  indirect 
charges  upon  each  form  of  report  used. 

QUESTIONS  FORMING  THE  SEVENTH  EXAMINATION. 

1.  In  what  manner  would  you  deal  with  the  following  factory  expenditures: 

(a)  Rent,  $750.cx),  paid  January  2,  1920,  for  3  months  in  advance. 

(b)  Rent,  750.00,  paid  January  2,  1920,  for  3  months  in  arrears. 

2.  Show  the  entries  in  the  Cash  and  Ledger  accounts  for  rent,  as  they  should 

properly  appear  after  the  transactions  under  (a)  and  (b)  of  question 
No.  I  have  been  recorded.  Explain  how  the  charges  for  rent  to  cost 
periods,  would  have  been  made. 

3.  Assume  the  annual  rent  of  a  factory  to  be  $3000.00,  the  area  covered  by 

the  rent  being  15,000  square  feet.  If  department  A  uses  2500  square 
feet,  department  B  uses  3500  square  feet,  and  department  C  uses  5000 
square  feet,  what  proportion  of  the  annual  rental  (shown  by  the  use  of  a 
formula  in  each  case)  is  chargeable  to  A,  B,  and  C.  No  considerations 
other  than  those  stated,  are  involved. 

4.  If  a  factory  commences  business  with  new  machinery  costing  $25,000.00, 

and  the  cost  of  maintenance  is  determined  to  be  5  per  cent  per  annum, 
and  it  is  also  estimated  that  the  machinery  will  work  during  the  first 
two  years  without  incurring  any  maintenance  expenses,  how  would  you 
deal  with  maintenance  during  the  first  two  years? 

5.  In  what  manner  may  the  following  factory  expenditures  be  satisfactorily 

apportioned,  as  direct  department  expenditures: 

(a)  Fire  Insurance? 

(b)  Liability  Insurance   (Workmen's  Compensation)  ? 

(c)  Real  Estate  Taxes? 

(d)  Property  Taxes? 

(Lesson  Seven) 


8. 


10. 


II. 


If  department  D  requisitions  supplies  sufficient  for  3  months,  from  the  gen- 
eral store  room,  how  would  you  ascertain  the  cost  of  supplies  used? 

If  a  non-productive  factory  department  has  incurred  direct  costs  of 
$1500.00,  and  general  overhead  costs  $150.00  are  apportioned  to  the 
department,  what  part  of  these  costs  should  be  distributed  to  the  produc- 
tive departments  of  the  factory,  and  why? 

What  is  the  philosophy  upon  which  the  following  methods  of  overhead 
distribution  is  based: 
(i)     Prime  cost  method? 

(2)  Productive  labor  cost  method? 

(3)  Productive  labor  hours  method? 

If  the  product  of  a  factory  is  manufactured  under  considerable  variations 
as  to  material  costs,  and  as  to  hand  labor  costs,  which  of  the  methods 
referred  to  in  question  No.  8  would  you  advocate  as  giving  the  most 
accurate  results  in  distributing  overhead,  and  why? 

When  machinery  is  largely  used  in  the  productive  process  of  a  factory, 
what  are  the  advantages  gained  by  a  machine  rate  method  of  dis- 
tributing overhead? 

From  the  following  details  prepare  formulas  showing  the  rates  to  be  used 
for  distributing  the  overhead  of  each  department,  and  for  distributing 
the  general  factory  overhead  to  the  departments. 

Each  distribution  is  to  be  shown  by  the  two  methods: 
(i)     The  productive  labor  cost  method. 
(2)     The  productive  labor  hours  method. 


Overhead  Charges 

Departments 

General 

A 

B 

C 

Factory 
Overhead 

Misc.  Factory  Expenses 

$     12.00 

$      8.00 

$ 

6.00 

$     10.20 

Wages  of  Foreman 

200.00 

Factory  Supplies 

49.12 

37.20 

26.10 

, 

Indirect  Material 

217.00 

Superintendence 

300.00 

Factory  Rent 

125.00 

100.00 

75.00 

Insurance 

20.00 

15.00 

10.00 

Depreciation 

3500 

25.00 

20.00 

Total  Overhead 

$441.12 

$  185.20 

$ 

137.10 

$  527-20 

For 

Productive  Labor  Cost 

$3150.00 

$1720.00 

l3 

:  500.00 

Total 

$6370.00  Factory 
For 

Productive  Labor  Hours     6300 

5000 

4800 

Total 

16100     Factory 

12.  If  a  machine  rate  method  of  distributing  overhead  is  employed,  what  es- 

sential principle  is  it  necessary  to  recognize  in  installing  the  method? 

13.  What  is  the  most  satisfactory  plan  to  adopt  for  reporting  factory,   or 

department   overhead   expenses,  in  order  to  facilitate  the  charging  and 
distribution  of  such  expenses? 


s 


(Lesson  Seven) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


EIGHTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


EIGHTH  LESSON 

SUBJECTS:    METHOD  OF  REPORTING  PRODUCTION.    USE  OF 

COST  SHEETS. 

(Collateral  reading,  chapters  13  and  14.) 

Production  Reports: 

A  production  report  primarily  serves  the  purpose  of  advising  the  comple- 
tion, or  present  condition,  of  a  particular  product.  The  report  may  take  the 
form  of  a  simple  notification,  such  as,  an  endorsed  copy  of  a  factory  order  re- 
turned to  the  Office,  or  the  report  may  be  detailed  for  the  purpose  of  record- 
ing costs. 

A  production  report  also  serves  the  purpose  of  presenting  information 
wrhich  shows  the  periodical  output  of  a  factory,  enabling  comparison  to  be 
made  for  different  periods,  and  comparison  of  the  productive  activities  of  various 
departments. 

At  the  end  of  each  cost  period,  a  summary  of  production  reports  distin- 
guishes the  various  classes  of  production,  such  as,  good,  defective,  repair  w^ork, 
construction  v/ork  on  factory  eqiupment,  etc.,  thereby  providing  a  basis  from 
which  the  various  departments  are  to  be  credited  for  the  cost  of  work  done,  and 
the  stores — or  other  disposition  of  the  product — charged. 

Accuracy  in  stating  quantities  of  product  is  a  requirement  which  cannot 
be  too  strongly  emphasized.  Inaccuracies  lead  to  errors  upon  the  Store  room 
records,  and  in  the  unit  cost  of  the  product. 

Methods  of  Reporting  Production: 

If  a  production  report  is  to  be  used  as  a  report  of  product  only,  without 
reference  to  costs,  it  must  report  such  of  the  following  conditions  as  are  applic- 
able to  the  working  conditions: 

Order  Number,  operation,  process,  department,  quantity,  and  description. 
In  this  case,  the  reported  details  would  be  noted  upon  the  summary  sheets, 
cost  sheets,  and  store  records — if  the  product  is  sent  to  the  stores. 

If  a  production  report  is  to  be  used  for  recording  costs,  it  must  give  the  fol- 
lowing additional  information: 

Details  of  Materials  used,  cost  of  materials  used,  direct  labor  cost,  overhead 
cost,  total  cost. 

In  this  case  the  production  report  would  virtually  be  a  cost  sheet. 

In  cases  where  a  product  is  progressively  operated  upon  by  more  than  one 
department,  before  it  assumes  a  finishel  form,  a  separate  production  report  mav 
be  required  from  each  operating  department,  whether  quantities  of  product  only 
are  reported,  or  the  costs  are  also  reported,  a  summary  of  the  separate  reports 
would  then  give  the  total  production  in  the  one  case,  and  the  total  production 
and  cost  of  production  in  the  other. 

If,  however,  a  production  report  is  to  serve  as  a  record  of  costs,  one  form  of 
report  may  be  used,  which  will  show  the  accumulated  costs  of  the  first  opera- 

■  3 

(Lesson  Eight) 


tion  to  be  carried  forward  to  the  second  operation,  the  accumulated  costs  of 
the  first  and  second  operations  to  be  carried  forward  to  the  third  operation,  and 
so  on,  until  the  product  has  passed  through  all  operations  and  is  finally  dis- 
posed of  as  finished  product.  The  following-  illustration  shows  how  the  costs 
of  progressive  operations  would  be  accounted  for  upon  a  single  report: 


Dept. 

Costs 

Operating 

Department 

Departmental 

Accumulated 

Debits 

Credits 

A        $2,010.80 
B           1,090.20 
C             760.30 
D             340.70 
Total  $4,202.00 

$2,010.80 
3,101.00 
3,861.30 

$2,010.80 
3,101.00 
3,861.30 

$2,010.80 
3,101.00 
3,861.30 
4,202.00 

The  Student  will  observe  that  the  costs  applied  to  the  product  by  each  de- 
partment are  shown  as  departmental  costs,  which  appear  as  accumulated  costs 
to  each  ensuing  department. 

The  debits  and  credits  to  the  operating  departments  show  in  each  case  a 
net  credit  for  the  cost  of  the  work  done,  the  final  oflfsetting  debit  being  made 
to  the  stores — in  the  case  of  finished  product  sent  to  the  store  room — or  to  cost 
of  Sales  if  the  product  is  shipped.  In  the  illustration  shown  above,  department 
D  is  assumed  to  finish  the  product,  therefore,  the  credit  to  department  D 
($4,202.00)  would  be  offset  by  a  charge  of  the  same  amount  either  to  the 
finished  stores,  to  cost  of  Sales,  or  to  whatever  disposition  was  made  of  the 
product. 

Clerical  detail  may  be  avoided,  in  many  cases,  by  using  various  factory  re- 
ports as  production  reports,  particularly  where  the  factory  report  must  neces- 
sarily report  quantity  of  product.  For  instance,  Labor  reports  must  state 
quantity  of  production  when  the  wage  system  is  other  than  the  day  rate,  and 
defective  work  reports  are  usually  required  to  show  all  the  details  necessary 
for  a  production  report. 

Cost  Sheets: 

The  cost  sheet  is  the  most  important  record  in  any  cost  accounting  system. 
It  collects  the  various  elements  of  cost  which  are  to  be  charged  as  the  factory 
cost  of  the  product,  thus  guiding  the  management  in  determining  minimum 
selling  prices,  and  in  indicating  the  more  profitable  lines  of  the  product.  Ac- 
curacy of  result  is  altogether  dependent  upon  accuracy  in  stating  quantities 
and  costs,  we  therefore,  reiterate  our  previously  express  admonition  respecting 
the  absolute  necessity  for  accuracy. 

The  essential  differences  between  Cost  sheets  used  for  the  order  and  process 
methods  of  cost  finding  must  be  clearly  understood.  Cost  sheets,  used  for  the 
order  method  of  cost  finding  deal  with  the  entire  order  as  the  unit,  presenting 
the  costs  for  each  distinct  process  or  operation  involved  in  the  work.  Even 
though  the  order  covers  a  number  of  similar  articles  (not  standard  product  of 
the  factory)  the  cost  sheet  would  deal  with  the  total  number  of  articles,  not  with 
each  article,  as  the  unit.  The  average  cost  of  each  article  would  then  be  ascer- 
tained by  dividing  the  total  cost  of  the  order  by  the  number  of  articles 
produced. 

The  material,  labor,  and  overhead  reports,  from  which  the  cost  sheets  are 
compiled  would  deal  with  the  entire  order  as  the  unit,  hence  the  cost  sheet 
would  be  designed  to  conform. 


(Lesson  Eight) 


Cost  sheets  used  for  the  process  method  of  cost  finding  deal  with  a  unit  of 
the  volume  produced,  which  may  be  represented  by  count,  weight,  or  measure- 
ment. The  product  may  pass  through  several  processes,  in  which  case  the 
cost  sheets  must  show  the  quantity  produced,  and  its  cost,  for  each  process. 
The  unit  cost  of  each  process  would  be  ascertained  by  dividing  the  process 
cost  by  the  number  of  units  produced  by  the  process,  and  the  total  unit  cost 
would  be  ascertained  by  dividing  the  total  cost  of  all  processes  by  the  number 
of  units  in  the  finished  product. 

All  factory  reports  designed  to  meet  the  requirements  of  a  process  method 
of  cost  finding,  from  which  process  cost  sheets  are  compiled,  would  deal  with 
the  process  as  the  unit,  hence  the  cost  sheet  would  be  designed  to  conform. 

It  should  now  be  apparent  to  the  Student  that  the  Cost  sheet  is  in  reality  a 
sheet  upon  which  the  various  factory  reports  of  materials,  labor,  and  overhead 
costs  are  collected  for  the  purpose  of  ascertaining  the  cost  of  finished  parts,  or 
total  cost,  of  any  order,  process,  job,  or  article,  and  that  the  form  of  the  cost 
sheet  must  conform  to  the  purpose  which  it  is  required  to  serve. 

QUESTIONS  FORMING  THE  EIGHTH  EXAMINATION. 

I.  (Problem)  Prepare  a  cost  sheet,  showing  the  cost  of  order  No.  looo,  for 
construction  of  a  spur  track.  The  length  of  way  is  1700  yards,  double 
track,  standard  wide  gauge.  Specifications  are  assumed  to  be  attached. 

The  operations  are  to  be  classed  as  Surfacing,  Grading,  Ballasting, 
Track  Laying. 

The  overhead  expenses  were  $5,000.00  to  be  distributed  to  the  classi- 
fications on  the  basis  of  the  productive  labor  hours  of  each. 

Construct  the  cost  sheet,  showing  the  cost  for  each  classification 
of  operation,  from  the  above  stated  details,  and  from  the  following 
material  requisitions  (all  materials  assumed  to  have  been  used)  and 
labor  reports. 

Consider  the  question  (problem)  thoroughly  before  formulating  your 
answer  for  solution. 

MATERIAL  REQUISITIONS. 

No.  I — May  6,  1920 — Ballasting — Order  No.  1000 — 250  tons  rock  ballast 
—$3.00  per  ton.  ^^^ 

No.  2 — May  9,  1920 — Ballasting — Order  No.  1000 — 35a  tons  rock  ballast 
— $3.00  per  ton. 

No.  3 — May  11,  1920 — Track  Laying — Order  No.  1000 — 1800  redwood 

ties  @  $90.00  per  100.     100,000  lbs.  16  lb.  steel  rails  @  $95.00  per 

looa  Joints,  Plates  and  Spikes,  cost  $320.00. 
No.  4 — May  16,  1920,  Track  Laying — Order  No.  1000.    50,000  lbs.  16  lb. 

steel  rails  @  $96.00  per  iooo.^j.^,,jt,  ^<Uti>.  -i-irf^^i^  t.<Mai^/<.o«ii 
No.  5 — May  21,  1920,  Tr^ck  Laying — Order  No.  1000.     13,200  lbs.  16  lb. 

Steel  Rails  @  $96.00  per  1000. Joints,  Plates  and  Spikes,  cost  $42.50. 
No.  6 — May  25,  1920.    Track  Laying — Order  No.  1000.     50  lbs.  Track 

Grease  @  .30  per  lb. 

LABOR  REPORTS. 

No.  I — May  I,  1920,  Order  No.  1000 — For  week  ending  May  1st,  20  men 
surfacing,  i  week  (48  hours  each)  @  $16.00  per  week. 

5 

(Lesson  Eight) 


No.  2 — May  8,  1920,  Order  No.  1000 — For  week  ending  May  8,  80  men 

surfacing,  i  week  (48  hours  each)  @  $19.50  per  week. 
No.  3 — May  10,  1920,  Order  No.  1000 — For    week    ended    May    10 — 50 

men  Grading — i  week  (48  hours  each)  @  $17.00  per  week. 
No.  4 — May  15,  1920,  Order  No.  1000 — For    week    ended    May    15,    40 

men  Ballasting — i  week  (48  hours  each)  @  $16.00  per  week. 
No.  5 — May  20,  1920,  Order  No.  1000 — For  week  ended  May  20,  50  men 

Track  Layings— i  week  (48  hours  each)  @  $24.00  per  week. 
No.  6 — May  27,  1920,  Order  No.  1000 — For   week    ended    May    27 — 40 

men   Track   Laying — i    week  (48  hours  each)  @  $24.00  per  week. 

2.  When  any  wage  system,  other  than  a  day  rate  system,  is  in  use,  would 

a  labor  report  for  such  a  system  serve  as  a  production  report?  If  so, 
why? 

3.  From  what  sources  are  the  details  obtained  for  compiling  a  cost  sheet? 

4.  What  do  you  understand  to  be  the  difference  between  a  cost  sheet  used 

for  the  order  method  of  cost  finding,  and  a  cost  sheet  used  for  the  process 
method  of  cost  finding. 

5.  Give  a  concise  explanation  of  the  purpose  for  which  a  production  report 

is  required. 

6.  A  report  is  received  by  the  Cost  department  showing  that  department  A 

has  completed  factory  order  No.  1268,  but  no  details  are  given  as  to  the 
costs  of  the  order.  Is  the  report  a  production  report?  Give  reasons  for 
your  answer. 

7.  Why  is  it  necessary  for  production   reports   to  indicate  the  disposition 

that  has  been  made  of  the  product,  when  the  reports  are  used  directly 
for  crediting  departments  with  the  work  reported  thereon? 


-iao'i  ^^■^ 


•6 

{Lesson  Eight) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


NINTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


NINTH  LESSON 

SUBJECTS:    STOCK  RECORDS— CHARGING  FACTORY  EXPENSES. 

(Collateral  reading,  chapters  15  and  16.) 

Stock  Records: 

The  student  has  learned  that  a  perpetual  inventory  is  one  of  the  important 
advantages  to  be  derived  from  a  detailed  cost  system.  He  also  knows  that  the 
various  stock  records  (Raw  materials,  work-in-process,  finished  product,  finished 
parts,  and  miscellaneous  stock)  supply  the  details  which  represent  a  perpetual 
inventory,  the  importance  of  accurate  material  reports,  both  as  to  materials  re- 
ceived, materials  used,  and  production  completed,  is  obvious.  It  is  equally  ob- 
vious that  accuracy  must  characterize  the  entries  made  upon  the  stock  records 
from  the  various  material  and  production  reports. 

Stock  Records  must  always  be  considered  with  respect  to  the  service  they 
are  to  render  in  connection  with  the  inventory.  The  foremost  consideration 
is  classification,  which  should  extend  to  each  important  distinctive  class  of 
raw  material  and  product  Each  classification  of  raw  material  and  product 
should  appear  separately  upon  the  stock  records  and  separate  sections  of 
the  store  rooms  should  be  allotted  to  them. 

In  the  appropriate  sequence  of  future  lessons,  the  student  will  learn  how 
the  various  classifications  shown  by  the  stock  records,  are  controlled  upon  the 
factory  and  general  accounts.  Our  present  purpose  in  referring  to  classifica- 
tions, being  to  prepare  him  for  a  better  understanding  of  the  subject  of  control, 
when  that  subject  is  reached. 

As  previously  stated,  the  perpetual  (o  book)  inventory  is  taken  from  the  stock 
records,  it  therefore  follows  that  differences  between  the  perpetual  (Book) 
inventory  and  a  physical  inventory  (an  inventory  from  inspection  of  stock 
actually  on  hand)  will  be  more  readily  traced  if  the  inventory  shown  by  the 
stock  records  is  appropriately  classified. 

In  previous  lessons  we  have  referred  to  inventory  tests  as  a  means  of  phy- 
sically verifying  the  stock  records  at  various  times  between  the  taking  of  phy- 
sical inventories.  At  this  point,  we  strongly  emphasize  the  importance  of  such 
tests  for  the  purpose  of  minimizing  the  liability  of  errors  necessitating  adjust- 
ments upon  the  records.  Inventory  adjustments  which  involve  appreciable 
amounts,  are  a  direct  reflection  upon  cost  accounting  methods. 

It  is  generally  the  case  that  some  part  of  a  merchandise  inventory  is  con- 
stantly changing,  other  parts  change  very  little,  whilst  other  parts  do  not 
change  at  all,  that  is,  the  stock  is  obsolete. 

In  the  case  of  constantly  changing  stocks,  the  stock  records  must  show  a 
running  balance  of  quantities  on  hand.  This  information  may  be  required  by 
the  purchasing  department  at  any  time.  ; 

Ability  to  supply  the  information  will  depend  upon  the  promptness  with  which 
the  receipts  and  withdrawals  are  entered  upon  the  stock  records. 

Provision  should  be  made  upon  the  stock  records  for  keeping  active,  inac- 
tive, and  obsolete  stocks  in  separate  sections.    This  will  greatly  facilitate  effec- 

.3 

(Lesson  Nine) 


tive  measures  for  handling  each  one  of  these  classes,  which  could  not  result  if 
they  were  indiscriminately  mixed  upon  the  records. 

By  way  of  further  emphasizing-  the  necessity  for  accurately  conducted  stock 
records,  the  student  is  to  be  reminded  of  the  relation  existing  between  the  stock 
records  and  the  various  factory  reports  from  which  the  cost  sheets  are  compiled. 
The  stock  records  are  largely  constructed  from  Reports  of  Materials  received, 
Material  Requisitions,  Reports  of  Materials  used,  Reports  of  Materials  trans- 
ferred between  departments,  etc.  The  material  costs  finally  entered  upon  the 
cost  sheets  are  obtained  from  the  stock  records. 

It  will  also  be  apparent  that  the  variety  of  sources  which  contribute  details 
for  entry  upon  stock  records,  require  a  systematic  method  of  procedure  in  hand- 
ling them.    Effective  records  must  be  kept  in  a  state  of  constant  completion. 

Charging  Factory  Expenditures: 

The  term  "Factory  Expenditures"  as  herein  used,  means  all  expenditures 
chargeable  directly  or  indirectly  to  the  factory  product,  they  will  therefore  be 
represented  by  expenditures  for  Materials,  Labor  and  overhead  expenses. 

The  term,  "Charging  Factory  Expenditures"  means  applying  the  expendi- 
tures to  the  factory  product,  as  its  cost.  The  procedure  required  for  this  pur- 
pose must  also  serve  to  connect  the  manufacturing  accounts  with  the  general 
financial  accounts  of  the  factory. 

Both  objects  are  accomplished  by  the  use  of  summarizing  records,  upon 
which  all  cost  details  for  a  cost  period  are  summarized,  the  respective  totals 
being  used  as  controlling  the  factory  accounts.  The  cost  period,  here  referred 
to,  is  an  equal  fractional  part  of  a  year,  into  which  the  accounting  system  of  the 
factory  is  divided,  such  as  a  calendar  month,  or,  preferably — the  period  covered 
by  a  pay-roll. 

Any  cost  system  which  is  based  upon  records  that  are  not  co-ordinated  or 
made  part  of  the  general  financial  system,  will  fail  to  accomplish  its  purpose, 
no  matter  how  elaborate  the  records  may  be. 

Briefly  stated,  the  object  accomplished  by  the  use  of  summarizing  records 
is  the  collecting  (in  one  total  for  each)  of  similar  classes  of  expenditures  during 
a  cost  period.  The  cost  sheets  for  the  same  period  would — if  summarized  in 
like  manner — present  the  same  result,  but,  cost  sheets  would  not  be  available 
for  the  purpose  until  all  entries  for  the  period  were  made,  the  work  involved 
would  therefore  be  represented  by  an  accumulation — and  at  a  time — which  it 
would  be  extremely  difficult  to  deal  with.  Furthermore,  the  cost  sheets  are  in 
constant  use,  consequently,  their  use  for  summarizing  purposes  would  conflict 
with  their  current  use. 

The  summarizing  records  are  compiled  from  the  same  sources  as  are  the  cost 
sheets,  therefore,  in  cases  where  cost  sheets  have  been  compiled  from  factory 
reports  (that  is,  factory  reports  which  have  not  also  served  the  purpose  of  a  cost 
sheet)  the  summarizing  records  act  as  a  check  upon  the  accuracy  of  the  cost 
sheets.  In  a  small  business,  the  cost  sheets  might  be  used  for  summarizing 
purposes. 

As  previously  stated,  the  ultimate  object  of  summarizing  records  is  to  connect 
factory  costs  with  the  factory  general  financial  accounts.  The  object  is  accom- 
plished in  the  following  manner: 

The  summarized  totals  of  all  costs  would  be  severally  charged  to  "Work  in 
Process",  credit  being  given  to  the  accounts  which  control  material  costs,  the 

4 

(Lesson  Nine) 


pay-roll  account  for  labor  costs,  and  the  various  accounts  which  control  the 
indirect  expenses,  or  overhead.  "Work  in  Process"  would  be  credited  with  the 
summarized  totals  of  the  elements  of  cost  (materials,  labor,  and  indirect  or  over- 
head expenses)  which  entered  into  the  cost  of  finished  product  or  product  with- 
drawn from  operation,  the  latter  being  debited.  Cost  of  Sales  would  be  charged, 
and  the  appropriate  Stores  classification  credited  with  the  cost  of  product  sold. 
This  procedure  will  be  made  clear  by  the  following  illustration: 

Assuming  the  summarizing  records  for  a  cost  period  to  show: 

Cost  of  Materials  put  into  operation                                        $10,000.00 

Cost  of  direct  labor  $5,000.00 )  Pay 

Cost  of  indirect  labor  750.00  I  Roll     5,750.00 

Other  overhead  expenses  1,250.00 

Finished  Product  Put  in  Stores  8,500.00 

Material  Cost  5,000.00 

Direct  Labor  Cost  3,000.00 

Overhead  Cost  500.00 

$8,500.00 

Finished  Product  Directly  Shipped  6,800.00 

Material   Cost  $4,000.00 

Direct  Labor  Cost  1,800.00 

Overhead   Costs.  1,000.00 

$6,800.00 

From  the  foregoing  details,  the  requisite  accounts  for  controlling  the 
expenditures,  and  for  connecting  them  with  the  general  financial  accounts 
would  appear  upon  the  ledger  as  follows: 

Ledger  Accounts  Dr.  Cr. 

Work  in  Process  Materials 

Materials  put  into  operation  $10,000.00 

Material  cost  of  finished  product 
Material  cost  of  product  shipped 
Balance 

Work  in  Process  Direct  Labor 

Direct  Labor,  per  summary 
Direct  Labor,  product  put  in  store 
Direct  Labor,  product  shipped 
Balance 

Work  in  Process  Overhead  $2,000.00 

Indirect  Labor  $  750.00 

Other  overhead  expenses     1,250.00 

$2,000.00 

Overhead,  finished  product  put  in  store  $  500.00 

Overhead,  finished  product  shipped  1,000.00 

Balance  500.00 

$2,000.00  $2,000.00 

5 

(Lesson  Nine) 


$5,000.00 

4,000.00 

1,000.00 

$10,000.00 

$10,000.00 

$5,000.00 

$3,000.00 

1,800.00 

200.00 

$5,000.00 

$5,000.00 

Pay-Roll  (General  Ledger) 

Pay-roll  for  the  period  $5,750.00 

Overhead  Expenses  (General  Ledger) 

Other  overhead  expenses  $1,250.00 

Stores  (Materials) 

Materials,  per  summary  $10,000.00 

Finished  Product 

Put  in  stores  $8,500.00 

Directly  shipped  6,800.00  $15,300.00 


Cost  of  Sales  (directly  shipped) 

$6,800.00 

Balance 

8,500.00 

$15,300.00 

$15,300.00 

Cost  of  Sales  (General  Ledger) 

Cost  of  product  shipped 

$6,800.00 

List  of  the  Foregoing  Ledger  Balances 

Dr. 

Cr. 

Work  in  Process — Materials 

$1,000.00 

Work  in  Process — Labor 

200.00 

Work  in  Process — Overhead 

500.00 

Stores   (Materials) 

$10,000.00 

Finished  Product   (Stores) 

8,500.00 

Cost  of  Sales  (General  Ledger) 

6,800.00 

Pay-roll  (General  Ledger) 

5,750.00 

Overhead  (General  Ledger) 

1,250.00 

$17,000.00 

$17,000.00 

With  the  foregoing  illustration  before  him,  the  student  will  observe  that  the 
total  Material,  Direct  Labor,  Indirect  Labor,  and  other  Overhead  costs  are 
charged  to  "Work  in  Process,"  a  separate  account  being  provided  for  each  ele- 
ment of  cost  which  is  in  process.  The  three  separate  accounts  may  be  provided 
upon  a  single  ledger  folio,  by  appropriate   divisional  rulings. 

Credit  is  given  to  each  "Work  in  Process"  account  for  the  cost  of  each  ele- 
ment which  entered  into  the  finished  product,  therefore,  the  balances  of  "Work 
in  Process"  show  the  inventory  of  incompleted  work  when  taken  collectively, 
and  individually  they  divide  the  inventory  into  the  elements  of  cost. 

The  credit  to  stores  for  materials  put  in  operation,  would  of  course  reduce 
the  stock  of  Raw  Materials  on  hand. 

The  debit  balance  for  "Finished  Product"  (Stores)  represents  the  inven- 
tory of  finished  product  on  hand. 

The  debit  balance  for  "Cost  of  Sales"  (General  Ledger)  covers  the  factory 
cost  of  product  shipped.  Financial  transactions  with  customers  are  conducted 
through  the  general  accounts,  therefore,  the  debits  to  customers  and  credit  to 
a  "sales"  account  would  appear  in  the  General  Accounts  for  the  selling  value  of 
product  shipped.  Assuming  a  separate  ledger  is  in  use  for  the  factory  accounts 
(Factory  Ledger)  and  the  general  accounts  to  be  contained  in  a  "General 
Ledger"  the  cost  of  sales  ($6,800.00)  would  appear  upon  the  "General  Ledger" 
as  a  debit  to  "Cost  of  Sales"  and  the  same  amount  would  appear  at  the  credit 
of  an  account,  "Factory  Ledger,"  the  latter  account  controlling  (in  the  General 
Ledger)  the  Factory  Ledger.  The  credit  balances  for  Pay  Roll  (General  Ledger) 

6 

(Lesson  Nine") 


and  Overhead  (General  Ledger)  would  be  charged  to  "Factory  Ledger"  account 
(in  the  General  Ledger)  at  the  time  the  expenditures  were  made  from  the  Gen- 
eral cash  account. 

In  the  Factory  Ledger,  the  above  stated  balances  would  appear  as  a  debit 
to  an  account  "General  Ledger"  for  Cost  of  Sales,  and  credits  to  the  same  ac- 
count for  Pay-roll  and  overhead  expenses. 

It  will  now  be  seen  that  the  controlling  accounts  "Factory  Ledger"  upon 
the  General  Ledger,  and  "General  Ledger"  upon  the  Factory  Ledger  must  al- 
ways be  in  agreement  as  to  amount,  and  that  the  balances  will  be  on  opposite 
sides  of  the  Ledgers,  the  control  in  the  Genera'l  Ledger  showing  a  debit  bal- 
ance, and  the  control  in  the  Factory  Ledger  showing  a  credit  balance. 

The  purpose  of  the  illustration  is  to  present  to  the  student,  in  the  most 
simple  form  possible,  the  following  accounting  procedure: 

(i)     The  method  by  which  the  details  shown  by  summarizing  records  are 
entered  upon  the  factory  accounts. 

(2)  The  method  by  which  the  factory   accounts    are   connected   with,    or 

made  part  of,  the  general  accounts. 

(3)  The   method   by  which   factory  accounts  are  controlled. 

The  ability  of  the  student  to  deal  with  practical  questions  and  problems, 
which  will  form  part  of  ensuing  lessons,  will  largely  depend  upon  a  thorough 
comprehension  of  the  accounting  principles  involved  in  the  illustration,  we 
therefore  request  him  to  study  it  thoroughly. 

QUESTIONS  FORMING  THE  NINTH  EXAMINATION. 

1.  Suppose  the  business  of  a  factory  to  be  conducted  under  an  admirable  sys- 

tem of  detailed  reports,  but  the  reports  are  merely  used  for  statistical 
purposes,  that  is,  they  are  not  incorporated  with  the  general  accounts. 
Under  these  circumstances  what  are  the  disadvantages  experienced  by 
the  management? 

2.  What  does  the  term  "Cost  period"  mean,  and  what  is  the  best  duration  for 

a  cost  period?. 

3.  Explain  concisely  the  principal  feature  of  difference  between  a  Purchase 

Record  and  a  Voucher  Record.  j,' 

4.  What  condition  may  make  it  necessary  to  use  a  Distribution  Record  in 

conjunction  with  a  Purchase  Record  or  Voucher  Register? 

5.  If  a  distribution  record  is  used,  how  would  postings  be  made  from  it? 

6.  Under  what  condition  is  it  necessary  to  prepare  an  analysis  of  a  payroll? 

7.  What  is  the  purpose  of  a  Pay-roll  Analysis? 

8.  What  factory  records  other  than  the  Ledger,  show  the  Inventory  of  Work- 

in-Process? 

9.  Should  the  factory  records,  referred  to  in  Question  8  at  all  times  agree 

with  the  Ledger  Account  of  Work-in-Process,  or  is  the  agreement  af- 
fected at  a  particular  time  only?    If  so,  at  what  particular  time? 

10.  Referring  to  the  Purchase  Record,  form  50,  page  246  of  the  collateral 
reading,  in  which  column  would  you  enter  an  invoice  for  $350.00  cash 
advanced  on  a  letter  of  credit  for  the  account  of  your  company? 

7 

(Lesson  Nine) 


11.  In  which  column  of  the  Voucher  Register,  form  52,  page  252  of  the  collat- 

eral reading,  would  you  enter  the  $350.00  referred  to  in  question  10. 

12.  Assume  the  following  invoices  to  have  been  received. 

(i)  Circulars  for  Sales  Department  $120.00 

(2)  Letter-heads  for  General  Office  50.00 

(3)  White  rag  waste  for  factory  30.00 

(4)  Wool,  for  manufacturing  purposes  875.00 

In  which  columns  of  the  Purchase  Record  and  the  Voucher  Register  would 
you  enter  the  amounts,  forms  50 — page  246,  and  52 — page  252  of  the  collateral 
reading,  being  the  forms  used  respectively  as  a  Purchase  Record,  and  as  a 
Voucher  Register? 

13.  Explain  how  the  totals  for  each  of  the  distribution  columns  in  the  forms 

of  Purchase  Record  and  Voucher  Register  (referred  to  in  question  12) 
would  be  resolved  into  the  various  sub-classifications  required  at  the 
end  of  each  cost  period.  The  question  extends  also  to  the  entries  made 
under  the  headings  "Miscellaneous  Accounts." 


(Lesson  Nine) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


TENTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


.,.-.  ^,  ■!-  -^ 


% 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


^y^fVOD*!!    T     t_J*^^'r./r-.-' 


TENTH  LESSON 

SUBJECTS:  RECORDING  TRANSFERS  WITHIN  THE  FACTORY 
RECORDING  SALES  AND  COST  OF  SALES. 

(Collateral  reading,  Chapters  17  and  18.) 

The  purpose  of  summarizing  records  were  illustrated  in  the  preceding 
lesson,  and  attention  was  given  to  the  charging  of  all  factory  expenditures 
which  entered  directly  or  indirectly  into  the  cost  of  the  product.  Considera- 
tion must  now  be  given  to  the  form,  and  individual  use  of  the  summarizing 
records,  and  their  application  to  transfers  within  the  factory. 

In  every  factory,  some — in  many  cases    all — of   the    summarizing    records, 
hereafter  described,  will  be  required.    The  movements  of  materials  must  be  fol- 
lowed and  accounted  for,  and  the  costs  of  production  ascertained.     The  ac- 
complishment of  these  purposes  is  the  objective  of  summarizing  records. 
The  summarizing  records  which  deal  with  material,  are  as  follows: 

Summary  of  Material  Requisitions: 

Each  form  should  be  consecutively  numbered,  and  dated  in  conformity  with 
the  cost  period.  The  form  should  provide  a  column  for  the  numbers  shown 
upon  the  material  requisitions,  which  should  be  entered  on  the  form  in  numer- 
ical order,  thus  ensuring  that  each  requisition  has  been  accounted  for.  The 
values  shown  upon  each  requisition  should  first  be  entered  in  a  "total"  column, 
then  extended  to  a  column  to  be  headed  with  the  classification  applicable  to 
the  material. 

The  additions  of  the  completed  summary  are  then  subject  to  proof,  by 
comparing  the  total  of  the  "total"  column  with  the  combined  totals  of  the 
various  classifications. 

Material  requisitions  will  usually  cover.  Direct  and  Indirect  Material,  Sup- 
plies applicable  to  Factory  Overhead,  Supplies  applicable  to  the  Selling  and 
Administrative  Departments,  and  Materials  and  Supplies  for  sub-stock  rooms. 

As  the  purpose  of  the  summary  is  to  determine  the  amounts  which  are  to 
be  credited  to  the  accounts  which  control  materials  and  supplies,  and  the 
amounts  which  are  to  be  charged  to  the  various  departments  for  materials  and 
supplies  used,  the  details  of  direct  materials,  indirect  materials,  supplies  ap- 
plicable to  factory  overhead,  to  the  selling  department,  and  to  the  administra- 
tive department,  must  be  shown  in  separate  columns  upon  the  summary,  so  that 
the  totals  of  each  may  be  ascertained.  Separately  summarized  totals  would  al- 
so be  required  of  material  transferred  to  sub-stock  rooms,  or  to  operating  de- 
partments,  in   quantities  not  currently  chargeable  to  the  product. 

Entries  upon  the  summary  should  be  made  after  the  requisitions  have  been 
priced  and  entered  upon  the  stock  records,  care  being  taken  to  see  that  all  req- 
uisitions have  been  accounted  for. 

In  our  reference — immediately  preceding — we  alluded  to  materials,  or  sup- 
plies, transferred  to  sub-stock  rooms,  or  to  operating  departments.  The  ma- 
terials or  supplies  actually  used  therefrom  will  be  obtained  from  "Reports  of 
Departmental  Material,  or  Supplies  Used,"  to  be  prepared  by  each  department. 

3 

(Lesson  Ten) 


These  reports  require  summarizing  in  order  that  charges  to  the  product,  and 
credits  to  the  sub-stores,  or  department  stores,  may  be  made. 

Summaries  of  Stock  Transfers: 

Transfers  of  Materials,  or  supplies,  from  one  principal  stock  room  to  an- 
other, or  to  a  sub-stock  room,  or  to  an  operating  department,  or  from  one 
operating  department  to  another,  should  be  covered  by  appropriate  requisitions, 
a  summary  of  which  should  give  the  details  necessary  for  adjusting  the  various 
stores  accounts. 

Summary  of  Labor  Transfers: 

This  summary  is  required  when  workmen  are  temporarily  detached  from  the 
department  in  which  they  are  usually  employed  and  assigned  to  work  in  an- 
other department.  In  such  cases,  the  position  of  the  workman  upon  the  Pay- 
roll would  remain  unchanged,  the  summary  is  therefore  required  for  the  pur- 
pose of  adjusting  the  cost  of  his  labor,  as  between  the  department  which  is 
charged  from  the  pay-roll,  and  the  department  for  which  he  temporarily 
worked.  Labor  transfers  would  be  entered  upon  the  summary  from  "Labor 
Transfer  Reports"  which  should  be  issued  when  the  transfer  is  made.  The 
report — as  issued — would  give  the  workman's  pay-roll  number,  his  name,  the 
department  from  which,  and  to  which  he  was  transferred,  and  the  date  of  the 
transfer.  The  Labor  Reports  covering  his  temporary  employment  should 
show  that  he  was  temporarily  transferred  under  "Labor  Transfer  Report"  No. 
....  (giving  the  number)  in  addition  to  the  information  usual  to  labor  reports. 

Summary  of  Shop  Order  Costs : 

Shop  order  costs  deal  with  the  cost  of  repairs  and  maintenance  within  the 
factory.  Such  costs  are  therefore  overhead  charges  to  the  departments  which 
are  benefitted  by  them.  Upon  the  summary  they  must  be  separated  from  pro- 
duction costs.  It  is  rarely  the  case  that  repair  and  maintenance  work  is  done 
by  the  department  for  which  it  is  required,  the  summary,  however,  will  enable 
a  proper  adjustment  as  between  the  department  which  does  the  work  and  the 
department  for  which  it  was  done. 

The  summaries  are  consecutively  numbered,  and  dated  for  each  cost  period, 
and  provide  details  showing  the  number  of  the  factory  order,  or  standing 
order,  which  authorized  the  work,  the  amounts  for  material,  labor,  and  over- 
head to  be  credited  to  the  department  doing  the  work,  and  to  be  concurrently 
charged  to  the  particular  repair  and  maintenance  account  for  which  the  work 
was  done.  They  are  generally  prepared  from  cost  sheets  of  repair  work,  the 
caption  of  the  columns  indicating  the  accounts  to  which  postings  are  to  be  made. 

Summary  of  Costs  for  Defective  Work: 

This  summary  is  required  for  the  purpose  of  crediting  the  department  which 
operated  upon  the  defective  product,  and  charging  the  appropriate  account  in- 
volved. The  summary  is  prepared  from  cost  sheets  which  cover  operations 
upon  defective  product. 

Summary  of  Factory  Overhead  Distribution: 

The  items  of  factory  overhead  which  are  to  be  summarized,  are  obtained 
from  the  Purchase  Record  (if  used).  Voucher  Register  (if  used)  Pay-roll  or 
pay-roll  analysis,  and  from  the  other  summarizing  records  which  may  show 
charges  for  overhead. 

4 


When  completely  summarized,  postings  may  be  made  to  the  various  fac- 
tory accounts  affected,  and  from  those  accounts  the  summary  of  Factory 
Overhead  Distribution  may  be  prepared,  the  procedure  being: 

Ascertaining  the  amount  chargeable  to  non-productive  departments. 

Distributing  the  overhead  of  each  non-productive  department  to  the  pro- 
ductive departments. 

Ascertaining  the  overhead  of  productive  departments  in  order  that  the  de- 
partmental  accounts   of   w^ork   in  process  may  be  charged. 

The  distributed  overhead  may  be  shown  upon  consecutively  numbered 
forms,  for  each  department,  a  description  of  the  items  being  listed,  and 
the  amounts  of  each  item  extended  to  a  column  for  each  cost  period  of 
a  year.  The  overhead  expenses  of  each  department  v^ill  then  be  in 
comparative  order,  by  cost  periods,  increases  or  decreases  being  instantly 
apparent. 

Summarizing  the  Sales  and  Cost  of  Sales: 

These  summaries  are  respectively  required  as  a  means  of  controlling  the 
customers  accounts  upon  the  General  Ledger,  and  crediting  the  factory  for 
the  cost  value  of  product  sold.  The  summary  of  sales  records  each  sales  in- 
voice (consecutively  numbered)  so  that  the  total  of  all  sales  invoices,  for  a  cost 
period,  may  be  charged  to  "Accounts  Receivable"  upon  the  General  Ledger, 
this  account  controlling  the  Individual  Ledger,  in  which  each  customer's  ac- 
count is  kept.  The  summary  provides  columns  for  the  number  of  the  sales 
invoice,  amount  of  the  sale  (in  column  headed  "Charge  Accounts  Receiv- 
able") each  account  being  then  extended  to  a  column  headed  with  the  classi- 
fication of  the  product  sold. 

Postings  would  be  made  from  the  summary  by  charging  the  controlling 
account,  "Accounts  Receivable"  and  crediting  each  sales  classification  with  the 
totals  shown  in  the  respective  columns. 

The  summary  of  Cost  of  Sales  shows  the  factory  cost  of  each  sales  invoice. 
Postings  would  be  made  by  charging  "Cost  of  Sales"  and  crediting  "Finished 
Product,"  under  the  appropriate  classifications,  with  the  total  of  each  classifica- 
tion under  which  the  sales  were  recorded. 

Summarizing  Credit  Memoranda: 

The  return  of  merchandise  by  customers,  necessitates  the  issuing  of  a 
"credit  memorandum"  which  sets  forth  all  the  accounting  details  of  the  credit 
to  be  made  to  the  customer.  Each  credit  rnemorandum  necessitates  the  prep- 
aration of  a  "Cost  of  Returns  Record"  which  shows  the  factory  cost  of  the 
merchandise  returned. 

A  separate  summary  of  credit  memoranda,  and  of  cost  of  returns  records 
will  be  required.  The  former  is  used  for  adjusting  the  customers  account,  and 
the  latter  for  adjusting  the  account  of  finished  product  in  the  stores.  Posting 
from  the  summaries  would  take  the  following  course: 

The  total  of  returns  is  credited  to  the  controlling  account,  "Accounts 
Receivable,"  the  total  of  each  column  which  classifies  the  returns  being 
charged  to  the  sales  account  of  same  classification,  which  received  credit  for 
the  merchandise  sold.  It  will  be  observed  that  the  summary  of  returns 
must  provide  the  same  classifications  as  the  summary  of  sales. 

The  cost  of  each  class  of  return  is  charged  to  the  finished  stock  account 
for  the  same  classification,  and  credited  to  the  similar  classification  of  Cost  of 

5 

(Lesson  Ten) 


Sales.  It  will  be  observed  that  the  summary  of  the  "Cost  of  Returns 
Records"  must  show  the  same  classifications  as  the  summary  of  "Credit 
Memoranda." 

In  a  previous  lesson,  we  emphasized  the  importance  of  preventing  fluctua- 
tions as  far  as  may  be  possible.  If  credit  memoranda,  for  any  cost  period,  rep- 
resents an  abnormally  high  percentage  of  returns,  by  reason  of  large  returns 
from  the  sales  of  prior  cost  periods,  fluctuations  will  be  avoided  by  adjusting — 
if  practicable — the  prior  accounts  affected,  to  the  end  that  a  particular  cost 
period  may  bear  only  the  adjustment  incidental  to  it. 

If  such  adjustments  are  not  practicable,  by  reason  of  the  ledger  balances 
having  been  definitely  closed,  abnormally  large  returns  should  be  sufficiently 
explained  on  any  financial  or  statistical  statement  which  may  be  prepared. 

In  the  case  of  allowances  (not  involving  returns)  being  made  to  customers, 
the  credit  memoranda  issued  therefor  should  be  separately  summarized.  If  al- 
lowances are  abnormally  large,  an  effort  should  be  made  to  connect  them  in 
the  accounts  with  the  sales  accounts,  in  respect  of  which  they  were  made  by 
holding  them  in  specially  designated  allowance  accounts.  Otherwise,  allow- 
ances would  be  charged  to  a  current  Allowance  Account.  In  either  event,  al- 
lowances will  usually  appear  in  the  accounts  as  deductions  from  income,  not 
as  factory  cost.  Postings  from  credit  memoranda  issued  to  customers  are  made 
by  crediting  the  controlling  account  "Accounts  Receivable"  and  charging  an 
allowance  account.  ill 


QUESTIONS  FORMING  THE  TENTH  EXAMINATION. 

The  next  lesson  will  be  devoted  to  the  co-ordination  of  Factory  Accounts 
with  the  accounts  in  the  General  Ledger.  In  order  that  the  student  may 
thoroughly  comprehend  the  subject,  we  advise  a  careful  review  of  the  collat- 
eral reading  to  and  including  Chapter  i8. 

I.     A  customer's    order  has  been  received   for   the   undermentioned   articles, 
from  stock:  ': 

ARTICLES 

2  doz.  Mantel  Clocks  No. 

3  doz.  Auto  Clocks  No. 
6  doz.  Alarm  Clocks  No. 
Weights  &  Chains  for  Floor  Clock  No. 

1  doz.  Alarms,   Luminous  No. 

2  only  Travelers  8  day  No. 


Selling 

Cost 

Value 

Value 

0176— Class 

A 

$120.00 

$  80.00 

1762— Class 

B 

108.00 

75.00 

8492— Class 

C 

144.00 

105.00 

127— Class 

A 

32.00 

17.00 

5350— Class 

C 

30.00 

16.00 

1050— Class 

A 

12.00 
$446.00 

8.oa 

Total 

$301.0^ 

Conditions : 

Customer,  Jenkinson  and  Smith,  Brooklyn,  N.  Y.  Their  order  No.  1172^ 
shipping  order  No.  1000,  dated  May  i,  1920 — to  be  shipped  by  N.  Y.  C.  R.  R 
Freight  ($6.25)  to  be  prepaid  and  charged  to  customer.  Shipment  made  May  2 
1920,  4  packages  weighing  503  lbs.  Shipping  Clerk,  John  Jones,  Invoice  No 
1876,  was  renedered  May  2,  1920 — terms  net  30  days.  The  order  was  packec 
by  H.  Quinn.     Class  A,  B,  C  represent  three  product  classifications. 

The  student  is  requested  to  prepare  from  the  above  stated  details,  a  ship 
ping  order,  a  billing  record  (Invoice),  a  record  of  cost  of  sales,  and  a  combiner 
summary  of  Sales  and  Costs. 


The  required  forms  are  to  be  as  simple  in  design  as  possible,  each  form, 
however,  is  to  clearly  and  practicably  show  all  the  essential  details. 

At  the  present  stage  of  the  student's  progress,  the  question  of  preparing 
such  forms  by  any  of  the  multiplex  methods  now  in  use,  is  subordinate  to  a 
clear  understanding  of  the  details  which  each  form  should  present,  hence  our 
request  that  the  forms  required  in  connection  with  question  i  shall  be  as  simply 
constructed  as  possible. 

2.  If  an  inventory  test  disclosed  an  abnormally  large  difference  between  ma- 

terial on  hand,  and  the  quantity  shown  to  be  on  hand  by  the  Stock  Rec- 
ords (perpetual  inventory),  what  line  of  investigation  would  you  pursue? 

3.  Referring  to  a  Purchase  Record  or  Voucher  Register,  how  would  you  post 

the  following  details: 

(i)     Total  Purchases. 

(2)  Each  classification  of  the  Purchases. 

(3)  Purchases  entered  in  the  miscellaneous  column? 

4.  What  would  you  expect  a  summary  of  material  requisitions  to  show,  when 

issued  against  the  main  stores  of  a  large  factory? 

5.  What  is  the  purpose  served  by  a  summary  of  Department  Material  used? 

6.  If  material  requisitions  and  Reports  of  Materials  Used  cover  the  same 

material,  how  would  you  guard  against  charging  the  Material  to  the 
product  twice? 

7.  If  transfers  of  Materials,  made  from    one    store    room    to   another,    are 

covered  by  material  requisitions,  is  it  necessary  to  prepare  a  separate 
summary  record  of  such  transfers?    If  so,  why? 

8.  Should  shop  order  costs  for  repairs  and  maintenance  be  summarized  sep- 

arately from  production  costs? 
If  so,  why? 

9.  What  is  the  purpose  of  a  summary  of  Defective  Work  Costs  ? 

10.  What  is  the  difference  in  the  objects  accomplished,  between  a  Report  of 

Material  Used,  and  a  Report  of  Departmental  Material  used? 

11.  State  briefly,  what  is  accomplished  by  a  summary  of  factory  overhead, 

and  a  summary  of  factory  overhead  distribution. 


(Lesson  Ten) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


ELEVENTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


«  1 1  ry  H  )\  i     i 


../irri/iuoDOA  1  eoD 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


ELEVENTH  LESSON 

SUBJECT:    CONTROLLING  THE  COST  RECORDS,  BY  ACCOUNTING 
FOR  FACTORY  COSTS  IN  THE  GENERAL  LEDGER. 

(Collateral  reading,  Chapter  19.) 

The  Student  has  progressed  to  the  point  of  understanding  the  uses  of 
various  forms  of  Factory  Reports,  the  necessity  for  summarizing  the  reports, 
and  that  the  Summaries  present  the  details  necessary  for  the  purpose  of  com- 
bining the  factory  costs  with  the  General  Accounts.  The  method  by  which 
the  combination  is  effected  forms  the  subject  of  the  present  lesson. 

The  Cost  records  show  the  details  of  each  transaction  which  enters  into  fac- 
tory costs,  whilst  the  summarizing  records  are  constructed  with  the  object 
of  ascertaining  the  total  of  each  classification  of  the  Cost  records  for  a  given 
cost  period.  The  totals  thus  obtained  are  used  for  the  purpose  of  combining  the 
cost  records  with  the  general  accounts,  and  placing  the  factory  records  under 
an  accounting  control. 

Accounts  are  controlled,  when  their  various  details,  which  usually  appear 
in  a  separate  book  of  accounts,  or  upon  a  separate  set  of  accounting  records, 
are  represented  by  a  single  account  in  another  book  of  accounts,  the  single  ac- 
count being  the  controlling  account.  The  Controlling  account  would  show,  by 
a  single  balance,  the  net  aggregate  of  all  the  balances  which  appear  upon  the  con 
trolled  books,  or  records. 

The  Student  must  possess  a  clear  understanding  of  what  is  accomplished  by 
a  controlling  account,  and  the  method  by  which  such  an  account  is  constructed 
from  the  summarizing  records.  In  order  that  these  matters  may  be  clear  to 
him,  we  present  the  following  illustration  of  a  trial  balance  of  a  General  Ledger 
before  the  summarizing  records,  for  a  cost  period,  have  been  posted,  the  details 
which  are  to  be  posted,  and  the  trial  balance  after  the  postings  have  been  made. 
Before  proceding  with  a  detailed  examination  of  the  illustration,  we  make  the 
following  explanation: 

(a)  Our  object  in  presenting  the  illustration,  in  the  manner  shown,  is  to 

distinctly  exhibit  the  relation  of  the  summarizing  records  to  the  gen- 
eral accounts,  and  to  show  how  the  factory  accounts  are  controlled. 
In  order  to  accomplish  this  purpose,  the  balances  of  General 
Ledger  Accounts,  at  April  30,  1920,  which  are  not  aflfected  by  the 
summarizing  records — although  changed  in  amount — are  fictitious. 

(b)  In  order  to  simplify  the  illustration,  we  have  confined  it  to  a  few  ac- 

counts. Inventories  of  work  in  process,  and  finished  product,  have 
been  omitted.  The  entire  product  is  assumed  to  have  been  sold,  no 
sales  having  been  made  from  stock. 

(c)  Posting  from  the  summarizing  records   will    be   fully   understood — 

without  our  actually  showing  them — by  noting  the  changes  between 
the  commencing  and  ending  trial  balances,  set  out  in  the  detailed 
explanations  which  follow.  The  items  added  represent  debits,  and 
the  items  deducted  represent  credits.  ,:    , 

3 

(Lestnn  Eleven) 


Trial  balance  of  General  Ledger,  at  April  30,  1920 
(Before  posting  Summarizing  records  for  April) 


Account 


Cash 

Notes  Receivable 

Accounts  Receivable 

Merchandise  Inventory,  April  1st 


(sub-store) 


Machinery  and  Equipment 

Accounts  Payable 

Notes  Payable 

Capital  Stock 

Surplus 

Undivided  Profits,  April  1st 

Sales 

Merchandise  Purchases 


Pay  Roll  (wages  for  April) 
Factory  Overhead 
Selling  Expenses 
Administrative  Expenses 


Classification 


Store  A. 
Store  B. 
Store  C. 
Dept.  E. 
Dept.  F. 
Dept.  G. 


Store  A. 
Store  B. 
Store  C. 


Dr. 


$28 

25 

162 

101 

60 

68 

1 

3 
39 


750 
949 
847 
917 
433 
377 
220 
750 
040 
427 


97 
03 
23 
80 
40 
90 
10 
00 
20 
18 


20 
18 
23 
24 

3 

2 


$584 


200 

800 

249 

621 

92 

090 

000 
768 


50 

50 

30 

90 

59 

00 

00 
60 


Cr. 


$68 
19 

330 
65 
11 
90 


422 
210 
000 
000 
917 
218 


19 
20 
00 
00 
61 
60 


$584 


768 


60 


(Lesson  Eleven) 


Factory  Accounts,  for  April,  1920.     (To  be  controlled) 


Summarizing  Record 


Summary  of  Material  Requisitions 
Materials 
Materials 
Materials 

Overhead  Supplies 
Overhead  Supplies 
Overhead  Supplies 

Summary  of  Pay-roll  or  Analysis 
Productive  Labor  Cost 
Productive  Labor  Cost 
Productive  Labor  Cost 

Summary  of   Department   Material  Used 
Additional    material    from   substores 
Material  used  from  sub-store 
Material  used  from  sub-store 
Material  used  from  sub-store 

Summary  of  Department  Transfers 

Materials  from  Dept.  A  to  Dept.  C. 

Summary  of  Sales  Records 
Sales 
Sales 
Sales 

Summary  of  Cost  of  Sales 
Cost  of  Sales 
Cost  of  Sales 
Cost  of  Sales 

Summary  of  Factory  Overhead  Distribution 
Overhead  Distributed 
Overhead  Distributed 
Overhead  Distributed 


Classification 


Store    Product 


A 
B 
C 

A 
B 
C 


E 
F 
G 


1 
2 
3 

1 
2 
3 


1 

2 
3 


1 
2 
3 


1 
2 
3 


Details 


$10 

8 

13 


8 

6 

10 


120 
120 
140 


320 
460 
510 


240  20 


19 
16 

70 


40 
80 
15 


160 
220 


1 


220 
750 
040 


80 
90 


10 
00 
20 


820 


30 
20 
39 


20 
15 
26 


500 
500 
218 


90 


00 
00 
60 


061 
534 
801 


480 
503 
400 


39 
00 
80 


90 
04 
00 


Amount 


$31 


381 


291 


24 


05 


35 


621 


010 


820 


90 


90 


62 


218 


30 


90 


60 


39719 


383 


94 


(Lesson  Eleven") 


4-a 


Trial  balance  of  General  Ledger,  at  April  30,  1920 
(After  posting  Summarizing  records  for  April) 

Account 

Dr. 

Cr. 

Cash 

$32 

360 

48 

Notes  Receivable 

25 

949 

03 

Accounts  Receivable 

153 

065 

83 

Merchandise  Inventories 

Store  room  A 

t 

$110 

856 

81 

Store  room  B 

70 

652 

94 

Store  room  C 

78 

797 

25 

260 

307 

00 

Machinery  and  Equipment 

39 

427 

18 

Accounts  Payable 

$62 

250 

30 

Notes  Payable 

19 

210 

20 

Capital  Stock 

330 

000 

00 

Surplus 

65 

000 

00 

Undivic^ed  Profits,  April,  1920 

11 

917 

61 

Sales 

Sales  of  Product  No.  1 

30 

500 

00 

Sales  of  Product  No.  2 

20 

500 

00 

Sales  of  Product  No.  3 

39 

218 

60 

Selling  Expenses 

3 

090 

00 

Administrative  Expenses 

2 

000 

00 

Cost  of  Sales: 

Cost  of  Sales — Product  No.  1 

20 

061 

39 

Cost  of  Sales— Product  No.  2 

15 

534 

00 

Cost  of  Sales — Product  No.  3 

26 

$578 

801 

80 

596 

71 

$578 

596 

71_ 

(Lesson  Eleven) 


4-b 


The  following  explanation  will  serve  to  make  clear  the  effect  of  the  sum- 
marizing records  upon  the  commencing  trial  balance,  as  shown  by  the  ending 
trial  balance: 


Account 

Reason  for  change  or  for  no  change  being  made 

Cash 

Changed   by  receipts  and  disbursements  only.     It  is  not  a 
factory  account. 

Notes  Receivable 

It  is  not  a  factory  account. 

Accounts  Receivable 

Changed  only  by  collections,  or  charges  for  Sales.     It  is  not 
a  factory  account. 

Merchandise  Inventories 

The  changes — store  room  A — are  accounted  for  as  follows: 

Inventory  April  1,  per  1st  trial  balance                      $101,917.80 
Purchases  per  1st  trial  balance                                          20.200.50 

Total  charges                                                 $122,118.30 

Credits: — 

Per  summary  of  Mat'l  Reqns.               10,120.19 
Per  summary  of  Mat'l  Reqns.                    320.40 

$10,440.59 
Per  summary  of  Dept.  transfers                820.90             11,261.49 

Inventory,  April  30th,  per  2nd 

trial  balance                                                              $110,856.81 

The  changes — store  room  B — are  accounted  for  thus: — 

Inventory  April  1,  per  1st  trial  balance                      $  60,433.40 
Purchases  per  1st  trial  balance                                          18,800.50 

Total  charges                                                 $  79,233.90 

Credits: — 

Per  summary  of  Mat'l  Reqns.            $  8,120.16 

Per  summary  of  Mat'l  Reqns.                   460.80               8,580.96 

Inventory,  April  30th,  per  2nd 

trial  balance                                                           $  70,652.94 

The  changes — Store  room  C — are  accounted  for  thus: — 

Inventory  April  1,  per  1st  trial  balance                      $  68,377.90 
Purchases  per  1st  trial  balance                                          23,249.30 
Transfer  from  Dept.  A  (per  summary)                                 820.90 

Total  charges                                                      $92,448.10 

Credits: — 

Per  summary  of  Mat'l  Reqns.               13,140.70 

Per  summary  of  Mat'l  Reqns.                   510.15           $13,650.85 

Inventory  April  30,  per  2nd  trial 

balance                                                                     $78,797.25 

(.Lesson  Eleven) 


Account 


Reason  for  change  or  for  no  change  being  made 


Mdse.  Inventories  at  Apr. 
1st,  sub-stores  E,  F  and 
G. 


Machy.  and  Equipment 


Accounts  Payable. 


Notes  Payable 
Capital  Stock 
Surplus 
Undivided  Profits 


Sales 


Mdse.  purchases 
Pay  Roll 


The  balances,  per  1st  trial  balance  were  accounted  for  by  the 
Summary  of  Department  Material  used,  they  do  not,  therefore 
appear  on  the  2nd  trial  balance. 


Is  not  a  factory  account. 


Changed  by  payments  to  creditors  and  by  credits  for  purchases. 
It  is  not  a  factory  account. 


[Are  not  factory  accounts 


The  same  amount  is  shown  on  both  trial  balances,  the  sum- 
marizing records,  however,  enabled  a  division  of  the  Sales 
into  the  classifications  product  No.  1,  product  No.  2,  product 
No.  3. 


See  Merchandise  Inventories. 


The  charge  $24,621.90,  shown  upon  the  1st  trial  balance,  has 
been  accounted  for  as  productive  labor  costs  per  summary  of 
Pay  Roll,  or  analysis  thus: — 


Product  No.  1 
Product  No.  2 
Product  No.  3 


$8,240.20 

6,160.80 

10,220.90 

$24,621.90 


Account 


Factory  Overhead 


Selling  Expenses. 
Administrative^Exp. 

Cost  of  Sales 


Reason  for  change  or  for  no  change  being  made 


The  charge  $92.59,  per  1st  trial  balance  has  been  distributed 
as  overhead,  it  does  not  therefore  appear  in  the  same  form 
upon  the  2nd  trial  balance,  the  summary  of  overhead  distribu- 
tion having  accounted  for  it  as  follows: — 

Factory  overhead,  per  summary  of  Matl.  Reqns,  $1,291.35 
Overhead  per  1st  trial  balance  92.59 

Overhead  distributed,  per  Summary  $1,383.94 


Are  not  factory  accounts 


This  account — appearing  upon  2nd  trial  balance  only — is 
constructed  from  the  summary  of  Cost  of  Sales,  which  would 
present  the  following  details: — 

Product  No.  1  Product  No.  2  Product  No.  3 

Mtls.,  per  summary 

Dept.  Mtl.,  summary 
Total  Materials 

Direct  Labor(Pay  Roll) 
Prime  Cost 

Overhead  per  sum- 
mary 
Total  Cost 


$10,120.19 
1,220.10 

$8,120.16 
750.00 

$13,140.70 
3,040.20 

$11,340.29 
8,240.20 

$8,870.16 
6,160.80 

$16,180.90 
10,220.90 

$19,580.49 
480.90 

$15,030.96 
503.04 

$26,401.80 
400.00 

$20,061.39 

$15,534.00 

$26,801.80 

Our  illustration  may  be  carried  a  step  further,  by  showring  that  the  posting 
of  the  summarizing  records  make  it  possible  to  prepare  the  foUov^ring  Balance 
Sheet,  and  Manufacturing  and  Profit  and  Loss  Statement  at  the  close  of  the 
cost  period,  April  30th,  1920,  that  is  to  say,  the  factory  records  and  the  General 
Accounts  are  now^  combined: 


fJLesson  Eleyen) 


i 


Balance  Sheet,  April  30th,  1920 


ASSETS 

Cash  $32,360.48 

Notes  Receivable  25,949.03 

Accounts  Receivable  153,065.83 

Mdse.  Inventories  260,307.00 

Machy.  and  Equipment  39,427.18 


Total  Assets  $511,109.52 


LIABILITIES 

Accounts  Payable  $62,250.30 

Notes  Payable  19,210.20 

Capital  Stock  330,000.00 

Surplus  65,000.00 

Undivided  Profits:  34,649.02 
Apr.  1,  1920       $11,917.61 
Net  profit, 
April                     22,731.41 

$34.649.02        

Total  Liabilities  and  Capital  $511,109.52 


Manufacturing  and  Profit  and  Loss  Statement 
For  the  month  of  April,  1920 


Sales 

Cost  of  Sales 

Manufacturing  Profit 

Expenses : — 
Selling  $3,090.00 

Administrative      2,000.00 

Net  Profit 


Total 

$90,218.60 
62,397.19 


Product  No.  1  Product  No.  2  Product  No.  3 


$30,500.00 

20,061.39 

$27,821.41         $10,438.61 


5,090.00 
$22,731.41 


$20,500.00 
15,534.00 


$39,218.60 
26,801.80 


$4,966.00        $12,416.80 


The  illustration  is  intimately  connected  with  the  more  complex  features  of 
accounting  for  Factory  costs,  which  will  be  introduced  to  the  Student  in  connec- 
tion with  future  lessons,  we  therefore  wish  to  impress  upon  him  the  absolute 
necessity  of  thoroughly  comprehending  it.  It  will  be  observed  that  the  Manu- 
facturing Statement  shows  the  Manufacturing  profit  from  each  product  classi- 
fication. 

In  the  absence  of  classifications,  the  total  manufacturing  profit  ($27,821.41) 
only  would  be  shown,  leaving  the  manufacturer  in  ignorance  as  to  the  amount 
of  the  manufacturing  profit  derived  from  each  one  of  the  three  lines  of  product. 

The  points  at  which  control  of  factory  costs  is  effected,  as  exemplified  in 
the  illustration,  are  clearly  shown  to  be  the  following: 

'  The  merchandise  inventories,  per  second  trial  balance,  should  agree  with 

the  same  classifications  shown  upon  the  store  room  records.  The  sum- 
mary of  Pay  Roll,  or  Analysis,  was  controlled  by  the  Pay  Roll  charged  upon 
the  first  trial  balance. 

!  The  subject  of  Ledger  Control  may  be  further  developed  by  the  follow- 

!  ing: 

Referring  to  the  two  trial  balances  of  the  previous  illustration,  and  as- 
suming two  Ledgers  to  be  in  use — General  Ledger,  and  Factory  Ledger — 
the  Control  exercised  within  each  Ledger  would  appear  as  follows: 


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10 


PROBLEMS  FORMING  THE  ELEVENTH  EXAMINATION. 

The  following  is  a  Trial  Balance  of  the  accounts  of  the  American  Mfg. 
Company,  as  shown  by  the  General  Ledger,  at  January  i,  1920. 


Account 

Dr. 

Cr. 

Cash 

$18 

100 

90 

Merchandise  Inventories: — 

Raw  Materials  and  supplies: — 

Store  Room  No.  1 

30 

500 

10 

Sub-store  room  Department  A 

10 

920 

40 

Sub-store  room  Department  B 

8 

240 

60 

Finished  Product  C 

90 

320 

80 

Notes  Receivable 

10 

000 

00 

Accounts  Receivable 

22 

120 

00 

Machinery  and  Equipment 

30 

250 

00 

Accounts  Payable 

$20 

452 

80 

Surplus 

50 

000 

00 

Capital  Stock 

150 
$220 

000 
452 

00 
80 

$220 

452 

80 

The  transactions  for  the  month  of  January  were  as  follows : 

Invoices  for  the  following  are  assumed  to  have  been  entered  in  the  Pur- 
chase Record  (or  Voucher  Register)  and  posted  therefrom  to  the  Ledger: 

Raw  Materials  purchased  (per  Invoice)  for  store-room  No.  i  $42,170.10 

Administrative  Expenses  (per  Invoice)  1,250.00 

Indirect  Expenses  (per  Invoice)  1,922.80 

Selling  Expenses  (per  Invoice)  370.20 

The  Pay-roll  Analysis  shows  the  following: 
Productive  Labor: 

Charge  to  Product  A  $10,150.80 

Charge  to  Product  B  8,140.20 

Non-productive  Labor  1,510.00 

Salaries  of  Salesmen  2,500.00 

Administrative  Office  Salaries  2,000.00 

(The  payroll  was  entered  on  the  Ledger  at  time  of  payment,  in  one  amount, 
it  did  not  therefore  show  any  analysis. )The  cash  transactions  were: 


Receipts  from  Customers 

Discounts  allowed  to  Customers 

Payments  for  purchases 

Discounts  received  from  payments  for  purchases 

Payment  of  Pay-roll  for  the  month 


$26,240.00 
272.80 

18,170.20 
200.40 

24,301.00 


(The  cash  receipts  and  payments  are  to  be  posted  from  the  cash  account, 
together  with  the  discounts.) 


(Lesson  Eleven) 


u 


The  Sales  were: 

Of  Product  A  $32,190.20 

Of  Product  B  38,809.80 

(The  Sales  have  not  previously  been  entered  upon  the  Ledger.) 

The  Material  Transfers  were: 

Materials  transferred  from  store-room  No.  i,  to  Sub-store,  De- 
partment A  $2,500.00 

A  summary  of  Material  requisitions  showed : 
Materials  withdrawn  from  Store-room  No.  i 

For  Product  A  $12,240.60 

For  Product  B  16,190.50 

A  Summary  of  Department  Material  used  showed: 
Material  used  from  sub-store.  Department  A 

For  Product  A  $2,720.60 

For  Product  B  3,279.40 

Materials  used  from  sub-store,  Department  B 

For  Product  A  $3,820.90 

For  Product  B  4,419.70 

A  Summary  of  Indirect  (Overhead)  Expense  Disti'ibution  showed: 

Distributed  to  Product  A  $1,000.80 

Distributed  to  Product  B  2,432.00 

A  Summary  Cost  of  Sales  showed: 

Cost  of  Sales — Product  A  $29,933.70 

Cost  of  Sales — Product  B  34,461.80 

The  Summary  of  production  showed : 

Of  Product  A: 

Materials  $18,782.10 

Labor  10,150.80 

Overhead  1,000.80 
Of  Product  B : 

Material  $23,889.60 

Labor  8,140.20 

Overhead  2,432.00 

It  is  assumed  that  a  Factory  Ledger  is  not  used,  therefore,  the  General 
Ledger  is  to  contain  all  of  the  transactions. 

As  no  details  are  given  for  apportioning  any  part  of  the  selling  and  ad- 
ministrative expenses  to  Product  A  and  B  those  expenses  are  to  stand  upon 
the  Ledger  unchanged. 

The  purpose  of  the  problem  is  to  test  the  student's  ability  to  connect  the 
factory  accounts  with  the  general  accounts,  and  to  this  end  it  has  been  simplified 
as  much  as  possible.  The  more  complex  considerations  of  detailed  procedure, 
and  Ledger  control,  will  be  presented  in  problems  to  be  subsequently  given. 

From  the  foregoing  details,  the  Student  is  required  to  prepare  the  necessary 
journal  entries  for  all  transactions,  (except  cash  transactions  and  purchases) 
post  the  Journal  entries  to  Ledger  Accounts,  show  each  Ledger  account — 
whether  balanced  or  not,  bring  down  the  balance  of  each  unbalanced  Ledger 
account,  and  submit  a  Trial  Balance,  as  at  January  31st,  1920. 

12 

(Lesson  Eleven) 


The  Journal  entries  may  be  made  on  a  continuing  form,  thus : 

Journal  entries  Dr.  Cr. 


The  Ledger  Accounts  may  be  on  a  continuing  form,  thus : 

Cash 


Pay  Roll 


(Lesson  Eleven) 


13 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


TWELFTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


5 

.....1     4 


.         ? 


1. 


TA»j  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


TWELFTH  LESSON 

SUBJECT:  LEDGER  CONTROL  OF  FACTORY  ACCOUNTS  FURTHER 

DEVELOPED. 

(Collateral  reading,  Chapter  20.) 

Before  proceeding  to  a  consideration  of  Ledger  Control,  the  Student  must 
clearly  understand  the  purpose  served  by  a  Controlling  Account. 

Briefly  stated,  the  purpose  is  that  of  periodically  collecting  from  the  sources 
of  original  entry,  the  totals  of  transactions  which  have  been  entered  in  detailed 
form  in  some  other  division  of  the  accounting  system.  Therefore,  the  balance 
shown  by  a  Controlling  Account  should  agree  with  the  aggregate  of  the  bal- 
ances shown  by  the  records  to  which  the  individual  items  were  posted. 

With  the  purpose  served  by  a  Controlling  Account  clearly  understood,  we 
will  illustrate  the  subject  of  Ledger  Control  by  resolving  the  details  given  in 
the  problem,  which  formed  the  Eleventh  Examination,  on  the  assumption  that 
instead  of  all  the  accounts  being  kept  in  the  General  Ledger,  a  General  Ledger 
and   self-balancing   Factory  Ledger   are  to  be  used. 

The  Trial  Balance  at  January  i,  1920,  shown  by  the  problem,  was  wholly 
contained  in  the  general  ledger.  Under  the  assumption  that  a  General  Ledger 
and  Factory  Ledger  are  to  be  represented,  the  Trial  Balance  would  be  divided 
as  follows : 

Trial  Balance  at  January  ist,  1920 

General  Ledger  Factory  Ledger 

Account  Dr.  Cr.  Dr.  Cr. 

Cash                                             $18,100.90 
Merchandise  Inventories: 
Raw   Materials   and   Sup- 
plies Store  room  No.   i                                                      $30,500.10 
Sub-store — Dept.  A                                                                  10,920.40 
Sub-store — Dept.  B                                                                    8,240.60 
Finished  Product  C                                                                    90,320.80 
Notes  Receivable                         10,000.00 
Accounts  Receivable                   22,120.00 
Machinery  &  Equipment            30,250.00 
Accounts  Payable                                             $  20,452.80 
Surplus                                                                    50,000.00 
Capital  Stock                                                       150,000.00 
Factory  Ledger                          139,981.90 
General  Ledger  $139,981.90 

$220,452.80       220,452.80       139,981.90       139,981.90 

The  above  stated  exemplification  of  the  two  Ledgers  shows  that  the  factory 
accounts,  contained  in  the  original  Trial  Balance,  now  appear  in  the  Factory 
Ledger.  The  aggregate  of  the  balances  (now  transferred  from  the  General  Led- 
ger)   is    represented    by    the    Controlling  Account   "Factory  Ledger"   in  the 

3 

{Lesson  Twelve)  ' 


General  Ledger.  Similarly,  the  aggregate  of  the  balances  in  the  Factory  Ledger 
is  represented  by  the  Controlling  Account  "General  Ledger"  in  the  Factory 
Ledger.  The  respective  controlling  accounts  agree,  as  to  amount,  and  they 
appear  upon  opposite  sides  of  the  Ledgers. 

Taking  the  conditions  of  the  problem  in  the  order  in  which  they  are  stated, 
their  incorporation  in  the  two  Ledgers  would  take  the  following  course: — 

The  first  condition  relates  to  purchases.  These  transactions  would  be 
posted  from  the  Purchase  Record,  or  Voucher  R^egister,  as  follows : — 

General  Ledger  Accounts  Dr.  Cr. 

Accounts  Payable  (Purchases)  $45,713.10 
Factory  Ledger  (Raw  Materials)  $42,170.10 
Administrative      Expenses      (Pur- 
chases) 1,250.00 
Factory  Ledger  (Indirect  Expns.)  1,922.80 
Selling  Expenses  (Purchases)  370.20 

From  the  foregoing,  it  will  be  seen  that  the  purchases  made  for  the  Factory 
Account  are  charged  to  the  Factory  by  means  of  the  controlling  account  "Fac- 
tory Ledger",  the  purchases  held  in  the  remaining  General  Ledger  accounts 
having  no  immediate  accounting  relation  to  Factory  production. 

The  entries  to  be  made  in  the  Factory  Ledger  would  be  provided  for  by 
Journal  Voucher,  or  by  entries  upon  a  Factory  Journal  (depending  upon  the 
method  used).  In  either  event  the  form  would  somewhat  resemble  the 
following: — 

January  1920.  General  Ledger  Factory  Ledger 

Dr.  Cr.  Dr.  Cr. 

Store  Room  No.  i  $42,170.10 

Indirect  (Overhead)  Expenses  1,922.80 

Purchases  $44,092.90 

The  items  in  the  Factory  Ledger  Column  would  be  posted  individually  to 
their  respective  accounts  in  the  Factory  Ledger.  The  totals,  for  the  Cost  period, 
of  the  items  in  the  General  Ledger  columns  would  be  posted  to  the  "General 
Ledger"  account  in  the  Factory  Ledger.  After  the  postings  were  made,  the 
accounts  in  the  Factory  Ledger  would  show: 

Factory  Ledger  Accounts  Dr.  Cr. 

Store  Room  No.  i  $42,170.10 

Indirect  (Overhead)  Expenses  1,922.80 

General  Ledger  '  $44,092.90 

The  next  condition  of  the  problem  related  to  the  pay-roll  analysis.  The 
pay  roll  would  be  entered  upon  the  General  Ledger — from  the  cash  account — as 
follows : — 

General  Ledger  Accounts  Dr.  Cr. 

Factory  Ledger — Pay  Roll —  $19,801.00 

Selling  Expenses — Pay  Roll —  2,500.00 

Adminstrative  Expenses — Pay  Roll —  2,000.00 

and  the  following  entries  (posted  from  the  analysis  of  Pay  Roll)  would  appear 
upon  the  Factory  Ledger. 

4 


Factory  Ledger  Accounts  Dr.  Cr. 

Work  in  Process— Labor— Product  A  $10,150.80 

Work  in  Process — Labor — Product  B  8,140.20 

Indirect  Expenses  (Overhead)  Labor  1,510.00 

General  Ledger— Pay  Roll  $19,801.00 

The  next  condition  of  the  problem  relates  to  cash  transactions.  These 
would  be  dealt  with  as  follows : — 

General  Ledger  Accounts  Dr.  Cr. 

Cash  Account: 

Accounts  Receivable  $26,240.00 

Accounts  Payable  $18,170.20 

(Ledger  Accounts  previously  stated)  24,301.00 

Accounts  Receivable: — 

Receipts  from  Customers  26,240.00 

Discounts  allowed  Customers  272.80 

Accounts  Payable: — 

Payments  for  purchases  $18,170.20 

Discounts  from  purchases  200.40 

Discounts : — 

Allowed  Customers  272.80 

From  Purchases  200.40 

The  next  condition  of  the  problem  relates  to  Sales.  The  entries  would 
appear  upon  the  General  Ledger  only,  as  follows: — 

General  Ledger  Accounts  Dr.  Cr. 

Accounts  Receivable  (Sales)  $71,000.00 

Sales  of  Product  A  $32,190.20 

Sales  of  Product  B  38,809.80 

The  next  condition  of  the  problem  relates  to  transfers  of  materials,  which 
would  be  posted  to  the  Factory  Ledger  from  the  summary  of  "Material  Trans- 
fers" :— 

Factory  Ledger  Accounts  Dr.  Cr. 

Store  room  No.  i   (Transfers)  $2,500.00 

Sub-store,  Department  A  (Transfers)  $2,500.00 

The  next  condition  of  the  problem  relates  to  Material  Requisitions  issued 
on  Store  Room  No.  i.  These  would  be  posted  to  the  Factory  Ledger  from  the 
summary  of  Material  Requisitions : — 

Factory  Ledger  Accounts  Dr.  Cr. 

Store  room  No.  i  (Requisitions)  $28,431.10 

Work  in   Process— Materials — Product  A  $12,240.60 

Work  in   Process— Materials — Product  B  ;  [y;,j^  16,190.50      -iijy 

The  next  condition  of  the  problem  relates  to  Department  Material  Used. 
These  transactions  would  be  posted  to  Factory  Ledger  Accounts  from  the  Sum- 
mary of  Department  Materials  Used: — 

(Lesson  Twelve")  '' 


Factory  Ledger  Accounts 

Sub-store,  Department  A  (Materials) 
Work  in  Process — Materials — Product  A 
Work  in  Process — Materials — Product  B 
Sub-store,  Department  B  (Materials) 
Work  in  Process — Materials — Product  A 
Work  in  Process — Materials — Product  B 


Dr. 

$2,720.60 
3,27940 

3,820.90 
4,419.70 


Cr. 

$6,000.00 

8,240.60 


The  next  condition  of  the  problem  relates  to  the  distribution  of  the  Indirect 
(Overhead)  expenses,  which  would  be  posted  to  the  Factory  Ledger  from  the 
summary  of  distribution: 


Factory  Ledger  Accounts 

Indirect  (Overhead  expenses  (Distributed) 
Work  in  Process — Overhead — Product  A 
Work  in  Process — Overhead — Product  B 


Dr. 


Cr. 

$3,432.80 


$1,000.80 
2,432.00 

The  next  condition  of  the  problem  relates  to  production,  which  would  be 
posted  from  the  summary  to  the  Factory  Ledger: 


Factory  Ledger  Accounts 

Product  A 
Product  B 

Work  in  Process — Material — Product  A 
Work  in  Process — Labor — Product  A 
Work  in  Process — Overhead — Product  A 
Work  in  Process — Materials — Product  B 
Work  in  Process — Labor — Product  B 
Work  in  Process — Overhead — Product  B 


Dr. 

$29,93370 
34,461.80 


Cr. 


$18,782.10 

10,150.80 

1,000.80 

23,889.60 

8,140,20 

2,432.00 


The  next  condition  of  the  problem  relates  to  the  cost  of  Sales,  which  would 
be  posted  to  the  two  Ledgers  from  the  summary: 

General  Ledger  Accounts  Dr.  Cr. 

Cost  of  Sales— Product  A  $29,933.70 

Cost  of  Sales — Product  B  34,461.80 

Factory  Ledger  (Cost  of  Sales)  $64,395.50 

Factory  Ledger  Accounts  Dr.  Cr. 

General  Ledger  (Cost  of  Sales)  $64,395.50 

Product  A  (Cost  of  Sales)  $29,933.70 

Product  B  (Cost  of  Sales)  34,461.80 

As  a  means  of  further  elucidation,  the  student  is  requested  to  summarize  the 
accounts  represented  by  the  foregoing  entries  (both  as  to  accounts  and  Ledgers) 
connect  the  resulting  balances  with  the  Trial  Balance,  as  at  January  i,  1920,  pro- 
duce the  ending  Trial  Balance,  as  at  January  31,  1920,  and  forward  the  solution 
to  us. 


QUESTIONS  FORMING  THE  TWELFTH  EXAMINATION. 

1.  What  is  meant  by  a  self  balancing  Factory  Ledger? 

2.  If  a  Factory  Ledger  is  not  self  balancing,  is  it  possible  to  control  it  in  the 

General  Ledger,  and  how? 


As  between  a  Factory  Ledger,  which  is  not  self  balancing,  and  one  which 
is  self  balancing,  in  what  respect  would  Trial  Balances  differ? 

Name  and  explain  an  advantage  in  keeping  Work  in  Process  accounts 
classified  as  to  product,  and  as  to  elements  of  cost  which  they  represent. 

Referring  to  Ledger  Accounts  of  Work  in  Process  at  the  end  of  a  cost  period, 
what  factory  records  control  them  ? 

Assuming  the  production  of  a  factory  to  have  been  $35,000.00  for  staple 
product,  and  $5,000.00  for  a  machine  for  the  factory  use,  should  the 
Summary  of  regular  factory  production  show  $35,000.00  or  $40,000.00, 
and  why? 


(Lesson  Twelve) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


THIRTEENTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


TaoD 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


THIRTEENTH  LESSON 

SUBJECT:    GENERAL  FINANCIAL  STATEMENTS,  AND 
STATEMENTS  OF  FACTORY  COSTS. 

(Collateral  reading,  chapter  21.) 

The  value  of  any  financial  or  statistical  statement  is  wholly  dependent  upon 
the  manner  in  which  the  details  presented  are  arranged.  If  properly  arranged, 
the  information  which  the  statement  is  intended  to  convey  will  be  immediately 
apparent. 

If  improperly  arranged,  an  analysis  (or  virtual  rearrangement)  must  be  made 
before  required  information  is  obtained.  Care  in  the  preparation  of  statements 
is  an  absolute  necessity  which  we  wish  to  emphasize,  and  fully  impress  upon  the 
Student. 

It  is  equally  important  that  statements  are  presented  at  the  proper  time, 
that  is,  within  a  reasonable  time  after  the  transactions  occurred.  Promptly 
rendered  statements  enable  an  executive  to  take  prompt  measures  in  business 
policy  and  management,  whilst  lack  of  promptness  in  rendering  statements 
deprives  an  executive  from  the  advantage  which  would  have  accrued  from 
prompt  application  of  remedial  measures. 

The  advantage  of  a  properly  arranged  financial  statement  is  illustrated  by 
the  following  Balance  Sheets,  both  of  which  present  identical  details,  the  differ- 
ence being  in  their  arrangement  only. 


>UmU  b 


^3 

(.Lesson  Thirteen) 


BALANCE  SHEET,  JANUARY  31,  1920 
(Not  arranged  in  an  orderly  manner) 


ASSETS: 


Cash  on  hand 
National  City  Bank 
Furniture  and  Fixtures — Office 
Land  (Factory  Site) 
Merchandise  Inventory 
Accounts  Receivable 
Buildings 

Machinery  and  Equipment 
Notes  Receivable 
Total  Assets 


LIABILITIES: 


Accounts  Payable 
Capital  Stock 
Surplus 
Notes  Payable 
Undivided  Profits 

Total  Liabilities  and  Capital 


$  320.00 
12,570.10 
750.00 
30,000.00 
25,000.00 
52,814.90 
65,000.00 
90,500.00 
3,000.00 

$279,955.00 


$     8,500.00 

200,000.00 

50,000.00 

5,000.00 

16,455.00 

$279,955.00 


BALANCE  SHEET,  JANUARY  31,  1920 
(Arranged  in  an  orderly  manner) 


ASSETS: 


Current  Assets: 
Cash: 

National  City  Bank      $12,570.10 


On  hand 


320.00 


Accounts  Receivable 
Notes  Receivable 
Merchandise  Inventory 

Plant  Assets : 
Land 
Buildings 
Machinery  and  Equipment 

Furniture  and  Fixtures — Office 
Total  Assets 


LIABILITIES ; 


Cturent  Liabilities 

Accounts  Payable 
Notes  Payable 

Capital  Stock 

Surplus  and  Undivided  Profits 

Surplus 

Undivided  Profits 

Total  Liabilities  and  Capital 


$  12,890.10 

52,814.90 

3,000.00 

25,000.00 

$  93,705.00 


$  30,000.00 
65,000.00 
90,500.00 

$185,500.00 


$  8,500.00 

5,000.00 

$13,500.00 


$50,000.00 

16,455.00 

$66,455.00 


$  93,705.00 


185,500.00 


750.00 
$279,955.00 


$  13,500.00 


$200,000.00 
66,455.00 


$279.955  00 


(Lesson  Thirteen^ 


The  difference  in  the  arrangement  of  the  two  Balance  Sheets  is  immediately 
apparent.  The  arranged  statement  shows  the  details,  and  amounts,  of  the  total 
Current  Assets  and  Current  Liabilities,  the  difference  in  this  case,  being  the 
amount  of  Working  Capital,  thus: 

Current  Assets  $93,705.00 

Current  Liabilities  13,500.00 

Working  Capital  $80,205.00 

The  Statement  also  shows  the  details,  and  totals,  of  Plant  Assets,  and  of 
Surplus  and  Undivided  Profits. 

The  unarranged  statement,  whilst  presenting  the  same  balances,  fails  to 
give  any  information  other  than  the  amount  of  each  balance. 

Financial  Statements  for  manufacturing  businesses  will  usually  comprise  a 
Balance  Sheet  (exemplified  above),  a  manufacturing  Statement,  and  a  Profit 
and  Loss  Statement,  with  such  supporting  Schedules  as  may  be  necessary.  Any 
further  statements  relating  to  the  manufacturing  accounts  would  be  designated 
as  Statistical  Statements. 

A  Manufacturing  Statement  deals  with  the  financial  transactions  of  the  fac- 
tory, showing  (with  as  much  detail  as  may  be  required)  the  manufacturing 
Costs. 

A  Profit  and  Loss  Statement  deals  with  financial  transactions  (with  as  much 
detail  as  may  be  required)  of  the  business  in  its  entirety. 

The  following  illustrates  a  combinaton  of  the  two  statements,  which  would 
be  designated  as  a  Manufacturing  and  Profit  and  Loss  Statement. 

Manufacturing  and  Profit  and  Loss  Statement,  for  January  1920. 
Sales  $55,117.00 

Cost  of  Sales: 


Mdse.  Inventory  Jan.  i,  192c 
Merchandise  Purchases 

). 

$21,619.40 
15,122.30 

Deduct 

$36,741.70 

Mdse.  Inventory  Jan.  31,  192 

Cost  of  Materials 

Direct  Labor 

Factory  Indirect  Expenses 

10. 
$1,500. 

00 

$25,000.00 

11,741.70 

18,529.60 

2,666.00 

$32,937-30 
$22,179.70 

Percentage 
of  Sales 

Cost  of  Sales 
Gross  (Manufacturing)  profit 
Expenses : 

Selling  Expense 

Salesmen's  Salaries 

$3,640.80 

59-76 
6.61 

Commissions-Salesmen 

2,140. 

80 

Administrative  Expense 

Stationery  &  Printing 
Telegrams  &  Telephone 
Ofiice  Salaries 

$3,640.80 

$       57.10 

27-04 
2,000.00 

$2,084.14 

3-78 

Total  Expenses 
Net  profit 

$2,084. 

5 

$5,724.94 
$16,454.76 

29.85 
100.00 

(Lesson  Thirteen) 

Managers  and  Executives  are  accustomed  to  the  use  of  percentages.  They 
form  estimates  and  compare  results  by  means  of  percentages.  The  percent- 
ages which  the  various  Costs  bear  to  the  Sales — shown  in  the  illustration — are 
more  illuminating  to  the  Manager,  or  executive,  than  are  the  figures  represent- 
ing the  percentages. 

It  is  rarely  the  case  that  a  statement  is  sufficiently  explicit  by  exhibiting 
balances  only.  For  instance,  the  balances  shown  by  the  illustration  should  be 
supported  by  Schedules  giving  details  of  Accounts  Receivable,  Notes  Receivable 
(particularly  with  respect  to  collectibility)  Merchandise  Inventory,  Classifica- 
tion Changes  that  have  occurred  in  the  Plant  Assets  during  the  period, 
Accounts  Payable,  Notes  Payable,  Sales  Classifications,  and  Factory  Indirect 
expenses,  the  object  being  to  show  all  details  which  materially  affect  each  im- 
portant item  that  is  shown  upon  the  statement  in  the  form  of  a  total. 

The  financial  statements  illustrated  are  such  as  would,  be  required  by  an 
executive. 

Statistical  Statements,  and  reports  are  required  for  the  guidance  of  depart- 
ment managers.  As  an  instance,  the  manager  of  a  Sales  department  employing 
a  number  of  salesmen  should  be  informed,  at  the  close  of  each  cost  period,  of 
the  results  accomplished  by  each  salesman.  If  we  assume  four  salesmen  to  be 
employed,  the  following  statement  would  be  interesting  to  the  manager  of  the 
Sales  department.  If  in  addition,  a  statement  were  prepared  to  show  the  un- 
executed orders,  the  activities  of  each  salesman  would  be  under  close  scrutiny. 


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{Lesson  Thirteen) 


The  percentages  shown  on  the  statement  are  of  the  Sales.  A  statement  ar- 
ranged in  the  manner  shown,  would  inform  the  Sales  Manager  of  the  selling 
results  from  each  Salesman.  His  knowledge  of  the  possibilities  attaching  to 
territorial  assignments,  and  lines  represented,  enables  him  to  compare  actual 
results  with  anticipations.  The  Statement  puts  him  in  a  position  to  effectively 
criticize  each  Salesman. 

In  order  that  a  Sales  Manager  may  be  able  to  efficiently  direct  the  selling 
force,  he  must  be  regularly  advised  of  the  production  of  the  Factory,  the  cost 
of  production,  and  the  condition  of  the  inventories  of  all  finished  product.  It 
may  be  advisable  to  instruct  the  selling  force  to  concentrate  upon  particular 
lines,  or  to  accept  orders  only  for  future  delivery,  or  to  revise  selling  prices 
— etc.,  etc.  These  policies  would  be  largely  influenced  by  a  periodical  state- 
ment, somewhat  as  follows: 

Assuming  the  output  of  a  factory  to  consist  of  three  products,  and  the 
given  details  to  represent  the  output  for  a  cost  period,  the  Inventory  changes 
during  the  period  would  be  of  value  to  a  Sales  Manager. 

DETAILS  OF  INVENTORY,  RELATING  TO  FINISHED  PRODUCT 


Inventory  at  beginning  of  Cost  Period 
Production  during  Cost  Period 

Total 

Cost  of  Sales  during  Cost  Period 

Inventory  at  End  of  Cost  Period 


Product  No.  1 


$  8,916.20 
9,417.70 


$18,333.90 
$16,120.60 


$  2,213.30 


Product  No.  2 


$14,210.30 
18,660.10 


$32,870.40 
$  4,280.64 


$28,589.76 


Product  No.  3 


$  3,147.10 
22,719.80 


$25,866.90 
$23,177.40 


$  2,689.50 


This  statement  advises  the  Sales  Manager  as  to  the  Sales  and  present  invent- 
ories of  each  of  the  products,  from  which  he  will  be  able  to  intelligently  regu- 
late production,  particularly  if  the  products  are  standard  with  the  factory. 

A  statement  should  also  be  presented  to  the  Sales  Manager  showing  the 
various  classifications  of  Raw  Materials  in  the  inventory,  for  which  there  ap- 
pears to  be  little  demand.  He  may  be  able  to  promote  the  Sale  of  a  finished 
product  which  will  absorb  the  raw  materials  in  question. 

Periodical  statements  should  be  furnished  to  the  Purchasing  Department 
showing  the  condition  of  the  inventory  with  respect  to  raw  materials  for 
which  maximum  and  minimum  quantities  have  been  set,  by  way  of  confirming 
the  imposed  conditions,  and  also  for  the  purpose  of  bringing  to  the  notice  of 
the  department  any  obsolete  stock  that  may  exist.  If  the  Sales  department 
is  unable  to  deal  with  it,  the  purchasing  department  may  be  able  to  arrange 
for  its  return  to  the  seller,  or  otherwise  dispose  of  it. 

Statements  to  General  Superintendents,  or  Production  Manager,  will  par- 
ticularly deal  with  volume  of  production,  and  the  costs,  for  comparable  periods. 
If  we  assume  a  Factory  to  be  divided  into  three  departments — A — B — C — a 
statement  of  Costs  and  production,  may  be  illustrated  as  follows:  (Assumed 
amounts  are  used,  except  where  the  amounts  of  one  statement  enter  into  an- 
other statement.) 


(Lesson  Thirteen) 


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A  further  schedule  should  be  prepared,  showing-  the  units  of  similar  product 
turned  out  during  the  comparative  periods.  A  comparison  of  costs  only  would 
not  provide  a  basis  from  which  efficiency  could  be  gauged,  since  the  material, 
labor,  and  overhead  costs  may  have  varied,  for  identical  products.  If,  however, 
the  statements  shown  above  are  supported  by  a  schedule  of  unit  production,  the 
management  would  be  able  to  thoroughly  dissect  the  activities  of  each  depart- 
ment. 

The  figures  in  the  illustrations  are  assumed  throughout,  except  at  the  points 
of  their  connection  one  with  the  other,  the  connecting  figures  being  susceptible 
to  proof. 

Extreme  care  should  be  taken  to  ensure  accuracy  in  all  statements  sub- 
mitted. Where  the  figures  in  one  statement  are  also  included  in  a  connecting 
statement,  proof  of  agreement  should  be  made. 

In  order  that  statements  may  be  submitted  promptly,  all  details  must  be 
kept  closely  entered  and  posted. 

PROBLEM  FORMING  THE  THIRTEENTH  EXAMINATION. 

The  following  problem  is  designed  to  test  the  student's  ability  to  properly 
account  for  a  number  of  classifications. 

Problem : 

The  following  details  for  a  cost  period  are  shown  by  summarizing  Records : 

Summary  of  Material  Requisitions : 

Raw  Materials,  from  store  room  No.  i  for  Department  A  $18,167.14 

Raw  Materials,  from  store  room  No.  i  for  Department  B  22,832.86 

Raw  Materials,  from  store  room  No.  2  for  Department  C  15,216.40 

Summary  of  Material  used  by  Departments : 

Dept.  A  for  Product  No.  i,  $8370.60— Product  No.  2,  $  4180.10  $12,550.70 
Dept.  B  for  Product  No.  3,  $7160.20 — Product  No.  4,  $11316.14  18,476.34 
Dept.  C  for  Product  No.  5,  $3170.60 — Product  No.  6,  $  6000.90  9,171.50 

Summary  of  Pay  Roll  Analysis : 

Productive  Labor, 

Dept.  A.  Product  No.  i,  $5120.10 — Product  No.  2,  $4960.20  $10,080.30 

Dept.  B.  Product  No.  3,  $7719.15 — Product  No.  4,  $8122.22  15,841.37 

Dept.  C.  Product  No.  5,  $2930.40 — Product  No.  6,  $5420.15  8,350.55 

Non-productive  labor.  Department  A  1,024.37 

Non-productive  labor.  Department  B  850.00 

Non-productive  labor,  Department  C  400.00 

The  Factory  Overhead  reported  by  the  General  Office  was  as  follows : 

(An  account  for  each  item  is  to  be  shown  upon  the  Factory  Ledger.) 

Indirect  Material  $217.80 

Indirect  Labor  894.80 

Rent  ($350.00)  Insurance  ($150.00)  500.00 

Taxes  ($180.00)  Depreciation  ($275.00)  45S-00 

Light,  Heat  and  Power  320.40 

Repairs  ($126.50)  Supplies  ($218.90)  345-40 

Sundry  Expenses  114.10 


(Lesson  Thirteen) 


Total  $2,847.50 

11 


Summary  of  Factory  Overhead  Distribution,  to  Departments. 


Description 

Total 

Dept. 
A 

Dept. 
B 

Dept. 
C 

Indirect  Material 

$217.80 

$92.60 

$57.40 

$67.80 

Indirect  Labor 

894.80 

390.40 

287.60 

216.80 

Rent 

350.00 

125.00 

125.00 

100.00 

Insurance 

150.00 

60.00 

50.00 

40.00 

Taxes 

180.00 

65.00 

62.50 

52.50 

Depreciation 

275.00 

115.00 

60.00 

100.00 

Light,  Heat  and  Power 

320.40 

155-00 

100.00 

65.40 

Repairs 

126.50 

80.00 

46.50 

SuppHes 

218.90 

60.90 

100.10 

57.90 

Sundry  Exenses 

114.10 

44- 10 

40.00 

30.00 

$2,847.50 

$1,108.00 

$962.60 

$776.90 

Summary  of  Overhead  Distributed  to  Products 


Department  A       Department  B     Department  C 
Dept.  Product  Product  Product 

Total       No.  I         No.  2         No.  3     No.  4      No.  5        No.  6 

Department  A      $2132.37  $1108.00  $1024.37 

Department  B        1812.60  $962.60  $850.00 

Department  C        1176.90 


$776.90    $400.00 


$5121.87  $iio8.oo  $1024.37  $962.60  $850.00  $776.90     $400.00 


12 


(Lesson  Thirteen) 


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Lesson  Thirteen 


13 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


FOURTEENTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


DViiTWuODDA  tpQO 


3dHlJ 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to^  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


FOURTEENTH  LESSON 

SUBJECT:    GENERAL  REVIEW  OF  IMPORTANT  MATTERS  IN  THE 
PROCEDURE  OF  HANDLING  COST  RECORDS?=^  ^"     ^^' 

'      The  student  is  now  famiHar  with  the  variotigibrnis  of  factory  reports,  their 
purposes,  and  their  inter-relation  with  the  financial  records. 

The  variety  of  the  reports,  the  differing  sources  from  which  they  originate, 
and  the  accounting  purposes  which  they  serve,  at  once  suggest  the  importance 
of  having  a  well  planned,  and  properly  conducted  system  for  utilizing  them. 

A  well  planned,  and  properly  conducted  system  will  involve  the  following 
prime  requisites: — 

(a.)     Designing  the  forms  in  such  manner  as  that  the  particular  conditions 
of  a  business  may  be  fully  provided  for.  The  student  may  take  it  for 
granted  that — in  a  general  sense — no  one  design  will  be  identically 
applicable  to  any  two  businesses,  even  though  the  two  businesses  are 
•  identical  in  character.     If  the  student  thoroughly  understands  the 

service  rendered  by  a  report,  he  will  not  encounter  any  difficulty  in 
providing  the  requisite  form. 

("b)  When  the  forms  are  put  in  use,  thereby  becoming  reports,  to  be  used 
for  accounting  purposes,  it  will  be  necessary  to  see  that  each  report 
(of  each  kind)  is  accounted  for.  This  may  be  accomplished  by  a  nu- 
merical order  of  control  as  to  single  reports,  and  serial  number  con- 
trol as  to  kind  of  report,  t       ^  -,       •      .  r 

(c)  The  system  should  provide  for  designated  personal  responsibility  as 
to  authority,  and  correctness  of  entries  and  computations,  that  is, 
indiscriminate  certifications,  initialling  or  signature,  should  not  be 
permitted.  c  y.  r;--^ ->.  5^.. -.  r^.,:    - 

(d^-'TThe  system  must  provide  an  efficient  means  for  issuing,  and  delivering 
the  reports  to  the  points  for  which  they  are  intended,  and  for  collect- 
ing them  when  they  are  available  for  office  use. 

(e)  The  system  must  provide  an  efficient  means  for  examining  reports,  to 

see  that  each  requisite  has  been  properly  complied  with,  before  they 
are  incorporated  in  the  accounts. 

(f )  The  system  must  provide  an  efficient  means  for  incorporating  the  re- 

ports in  the  accounts.  This  requirement  involves  the  employment 
of  methods  by  which  aggregations  (or  totals)  of  similar  items  enter- 
ing into  the  same  account  (or  classification)  may  be  posted  to  the 
accounts,  instead  of  posting  the  items  individually.  For  instance, 
postings  from  the  totals  of  the  summarizing  records  (referred  to  in 
previous  lessons)  will  save  the  clerical  effort  which  would  be  required 
if  the  summarizing  records  were  entered  upon  the  journal,  as  the 
original  accounting  entry.  Similarly,  if  all  similar  items  for  which  a 
special  column  could  not  be  provided  upon  the  Purchase  Record  or 
Voucher  Register  were  entered  in  the  miscellaneous  columns,  the  in- 
dividual postings  required  would  be  enormous,  whereas  the  aggre- 
gating similar  items  upon  an  analysis  record,  they  may  be  posted  in 

(Lesson  Fourteen) 


]  total.  This  procedure,  however,  requires  that  all  records — other  than 

regular  books  of  account — from  which  aggregations  are  posted  to  the 
Ledger,  must  be  clearly  indicated  in  the  Ledger  entry  both  by  de- 
scription, and  number,  so  that  reference  may  be  as  immediately  avail- 
able as  would  be  the  case  if  the  entries  were  posted  from  a  book  of 

. . , ,  account. 

."■11: 

(g)  The  system  must  provide  a  method  for  regularly  entering  the  reports, 
to  the  end  that  this  part  of  the  work  may  be  kept  up  as  closely  as 
possible,  thus  enabling  the  prompt  preparation  of  statements  at  the 
close  of  each  cost  period. 

^.,j(h)     The  system  must  provide  for  making  proofs  at  all  provable  points, 

'^  '  ■  such  as,  proving  the  purchases  and  material  requisitions  with  the  store 

room  records  when  the  latter  show  cost  values,  proving  the  labor 

reports  with  the  pay  roll,  etc.,  so  that  diflferences  may  be  corrected 

before  Ledger  entries  are  made. 

(i)  The  system  must  provide  a  thoroughly  adequate  method  for  filing  the 
reports  so  that  they  may  be  immediately  located,  for  reference  pur- 
poses. 

^'•QUESTIONS  FORMING  THE  FOURTEENTH  EXAMINATION. 
1.;  What  is  meant  by  the  term  "Perpetual  Inventory?" 

2.  Describe  the  procedure,  in  an  accounting  system,  required  to  produce  a 

perpetual  inventory. 

3.  Describe  the  conditions  which  determine  a  Cost  as  being  indirect,  or  over- 

head. 

4.  An  Invoice  for  merchandise  purchases  shows  the  following: — 

Imported  Raw  Materials  $2,500.00 

Trade  Discount  150.00          $2,350.00 

Duty  and  custom  charges  780.00 

Freight            -,  120.00 

Cartage  to  store  room  35oo 

Which  of  the  costs,  shown  by  the  Invoice,  would  you  include  as  Cost  of 

the  raw  materials? 

5.  Is  the  expense  of  packing  finished  product  a  factory  cost  invariably? 

Explain  your  answer. 

.  6.  Describe  the  manufacturing  conditions  which  must  exist  in  a  factory,  if 
the  special  order  and  process  methods  of  cost  finding  are  to  be  jointly 
employed. 

7.  If  several  standard  products  are  manufactured  in  a  factory,  what  principle 

would  you  employ  for  showing  the  manufacturing  cost  of  each  product? 

8.  Referring  to  the  usual  routine  of  factory  work,  and  the  requirements  of  a 

cost  system,  what  principal  written  orders,  and  reports,  would  generally 
be  required  for  conducting  the  system  from  the  point  of  providing  ma- 
terials to  the  point  of  ascertaining  costs? 

9.  Assuming  orders  No.  1,000  and  No.  1,050  to  be  in  process  of  manufacture 

and  that  scrap  material  from  order  No.  1000,  to  the  value  of  $100.00,  was 
used  on  order  No.  1,050.    How  would  you  account  for  the  scrap  material  ? 

(Lesson  Fourteen) 


10.  Referring  to  question  No.  9,  if  the  scrap  material  used  for  order  No.  1,050 

could  not  be  identified  with  the  original  material  from  which  it  was  ob- 
tained, how  would  you  account  for  it? 

11.  What  should  a  rate  for  depreciation  represent? 

12.  In  writing  depreciating  against  wasting  assets,  would  you  apply  the  depre- 

ciation as  a  credit  to  the  asset  account,  or  would  you  hold  it  in  a  reserve 
account?    Give  reasons. 

13.  Show  by  a  formula,  the  following  method  of  distributing  overhead: 

(a)  Prime  Cost  method 

(b)  Productive  Labor,  Cost  method 

(c)  Productive  Labor  Hours  method 

14.  What  are  the  sources  from  which  Factory  overhead  is  generally  compiled  ? 

15.  What  purposes  are  served  by  Production  Reports? 

16.  What  principal  financial  and  statistical  statements  would  ordinarily  be  of 

prime  interest  to  Executives  and  managers  at  the  end  of  each  cost  period? 

The  Student  will  please  note  that  the  Fifteenth  Lesson  will  be  de- 
voted to  a  preliminary  examination  of  subjects  previously  presented,  and 
covered  by  collateral  reading  to  and  including  chapter  No.  21.  Before 
answering  the  questions  and  problems,  which  form  the  examination,  a 
careful  review  of  the  collateral  reading  should  be  made. 


{Lesson  Fourteen) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


FIFTEENTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


FIFTEENTH  LESSON 

FIFTEENTH  EXAMINATION. 

The  answers  to  the  following  problems  are  to  be  connected  with  the  prob- 
lems by  the  number  of  the  problem,  and  the  letter  given  to  each  division  of  the 
problem.     Thus — Problem  No.   i,   (a),  (b),  etc.,  etc. 

Continuing  blank  forms  may  be  used  for  Journal  entries,  and  Ledger 
Accounts,  but  each  Journal  entry  or  Ledger  Account  must  be  distinctly  shown, 
thus: 

Journal  Entries Di\ Ci\ 

General  Ledger  

To  Cost  of  Sales  


Factory  Ledger  Accounts Di\  Cr. 


Cost  of  Sales 


General  Ledger 


Problem  No.  i. 

Factory  order  No.  2000  was  issued  for  the  manufacture  of  20  special  articles, 
of  similar  kind,  by  department  A. 

Charges  against  the  order  were  as  follows : 

Material  Requisitions  were  issued  on  Store-room  No.  i  for  raw  materials 
amounting  to  $2,500.00. 

Reports  of  Materials  used,  showed  the  Materials  used  amounted  to  $2912.00. 

Details  of  Labor  Charges,  expended  upon  the  order  were  reported  as: 

Productive  Labor  $3,060.00 

Non-Productive  Labor  390.00 

$3,450.00 

The  Total  Labor  Hours  expended  upon  the  Order  were  6880,  the  Cost  being 
$3,450.00,  as  stated  above. 

The  General  Factory  Overhead  amounted  to  $619.20,  and  the  Productive 
Labor  Hours  of  the  factory  were  20640. 

-3 

(Lesson  Fifteen) 


It  is  to  be  assumed  that  no  entries  have  been  made  accounting  for  the  fore- 
going details. 

You  are  required  to  prepare  (a)  a  statement  showing  the  cost  of  the  Order 
for  Materials,  Labor,  Overhead,  and  Total  Cost. 

The  Factory  Overhead  is  to  be  distributed  on  the  basis  of  Productive  Labor 
Hours,  the  formula  for  distribution  being  shown. 

(b)  If  an  adjustment  of  the  Material  Account  of  Department  A  is  neces- 
sary, it  is  to  be  made  by  Journal  entry. 

(c)  Point  out,  and  explain,  an  error  which  exists  in  the  foregoing  condi- 
tions of  the  problem. 

Problem  No.  2. 

The  following  is  a  Trial  Balance  of  a  Factory  Ledger  at  the  commence- 
ment of  a  Cost  Period: 

Dr.  Cr. 

Raw  Materials  $i5o,cxx).oo 

Work  in  Process       Material       Labor      Overhead 
Product  I,  Dept.  A.  $10,058.73  $12,941.27  $    716.40  23,716.40 

Product  2,  Dept.  A.      6,213.43       5,453.24       610.60  12,277.27 

Product  3,  Dept.  B.     16,706.90    20,959.77     1,756.70  39.423-37 

$32,979.06  $39>354-28  $3,083.70 

$225,417.04 

General  Ledger  $225,417.04    $225,417.04 

The  following  production  is  reported  during  the  cost  period: 
Department  and  Product            Material        Productive  Labor               Overhead 
Dept.  A,  Product  No.   i         $30,176.20                  $38,823.80        \         <t,/;-Qon 
Dept.  A,  Product  No.  2           18,640.30                     16,359.70         /          ^3>070-9o 
Dept.  B,  Product  No.  3          50,120.70                    62,879.30                     5,270.10 
Defective  Work                               520.80                         640.20 
Defective  Work  of  Dept.  B 
was  corrected  by  Dept.  A. 
The  cost  is  to  be  applied 
as  Overhead  in  distribut- 
ing Department  Overhead.  


$99,458.00  $118,703.00  $8,949.00 

The  Department  Overhead  is  to  be  distributed  to  the  Product  on  the  basis  of 
Productive  Labor  Hours. 

The  Productive  Labor  Hours  of  Department  A  were  122630,  accounted  for 
as  follows: 

84583  hours  employed  on  Product  No.  i. 

36355  hours  employed  on  Product  No.  2. 

1422  hours  employed  on  defective  work  of  Department  B. 


122360 


From  the  foregoing  particulars,  prepare: 

Factory  Journal  entries.  Factory  Ledger  Accounts,  and  a  Trial  Balance  of 
the  Factory  Ledger  at  the  close  of  the  Cost  Period. 

4 

(Lesson  Fifteen) 


Problem  No.  3. 

From  the  following  Trial  Balance,  prepare  a  Balance  Sheet,  and  a  Manufac- 
turing and  Profit  and  Loss  (combined)  Statement: 

Trial  Balance,  May  31st,  1920. 

Account  Dr.  Cr. 


Cash  at  Bank 

$  80,120.60 

Cash  on  Hand 

1,410.20 

Accounts  Receivable 

120,190.10 

Notes  Receivable 

3,500.00 

Merchandise  Inventory 

112,260.20 

Accounts  Payable 

$  36,500.20 

Sales 

240,960.00 

Cost  of  Sales 

124,191.40 

Salesmen's  Salaries 

18,120.60 

Salesmen's  Commissions 

15,210.20 

Printing-  &  Stationery  (Sales  Dept.) 

820.40 

Office  Salaries   (Administrative  Dept.) 

6,290.00 

Printing  &  Stationery  (Administrative  Dept.) 

360.10 

Telephone  &  Telegrams  (Administrative  Dept.) 

190.20 

Machinery  &  Equipment 

100,000.00 

Capital  Stock 

250,000.00 

Surplus 

55,203.80 

$582,664.00    $582,664.00 

The  Merchandise  Inventory  at  May  i,  1920,  was  $96,120.40. 
Merchandise  Purchases  during  May,  were  $55,000.60. 
The   Cost  of  Sales  comprised: 

Materials  $38,860.80,  Labor  $80,120.40,  Indirect  Expenses  $5,210.20 — Total 
$124,191.40. 

You  are  also  requested  to  prepare  a  separate  schedule  showing  the  percentages 
of  Cost  to  Sales,  which  you  think  would  be  appreciated  by  the  management. 


(.Lesson  Fifteen) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


SIXTEENTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


ji  i  u  1 1 


iG/ii  /lOajOHDlK 


OMITl/UODOA   i-DD 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


! 


SIXTEENTH  LESSON 

SUBJECTS:    TAKING  PHYSICAL  INVENTORIES  THE  PURPOSES 

OF  PLANT  ASSET  RECORDS. 

(Collateral  reading,  chapters  22  and  23,) 

Physical  Inventories  are  usually  taken  once  a  year.  Under  the  most  favor- 
able conditions,  the  taking  of  such  an  inventory  involves  a  considerable  expen- 
diture of  time  and  clerical  work. 

In  a  large  business,  the  constantly  changing  condition  of  a  merchandise  in- 
ventory— from  moment  to  moment —  imposes  a  high  degree  of  skill  and  care 
both  as  to  accuracy,  and  interfering  as  little  as  possible  with  current  work 
if  the  inventory  is  taken  whilst  the  plant  is  in  operation. 

Ordinarily,  the  inventory  is  a  matter  of  such  prime  importance  as  to  war- 
rant the  stoppage  of  the  plant,  whilst  it  is  being  taken. 

In  this  connection,  the  student  will  more  fully  appreciate  the  importance 
of  what  has  been  said  in  previous  lessons  respecting  inventory  tests. 

If  tests  have  been  made  throughout  a  year  covering  the  greater  part  of 
the  inventory,  and  discrepancies  traced  and  adjusted,  the  reconciliations  of 
the  store  room  records  with  the  physical  inventory  will  be  very  materially 
simplified. 

The  arrangements  for  taking  a  physical  inventory  require  very  careful  plan- 
ning, particularly  with  respect  to  the  following: 

(a)  Superintendents,  Department  Managers,  Foremen,  Stock  Clerks,  Fac- 

tory Clerks,  and  other  employees  who  may  be  concerned  should  be 
notified  in  advance  of  the  intention  to  take  an  inventory  as  at  the 
close  of  business  upon  a  designated  date. 

(b)  The  responsibility  for  accurate  results,  and  properly  conducted  de- 

tails, should  be  placed  upon  an  employee  in  each  department,  whose 
duties  logically  qualify  him  as  the  person  who  should  supervise  the 
work. 

(c)  As  much  preliminary  work  should  be  done  as  possible,  in  order  that 

the  inventory  may  be  taken  with  the  least  possible  delay.  This 
applies  particularly  to  arranging  the  stocks  in  classified  order,  to 
facilitate'  counting,  weighing,  or  measuring,  and  designating  stocks 
which  are  obsolete.  The  management  will  probably  employ  means 
for  disposing  of  the  latter. 

(d)  Preparatory  work,  of  great  assistance,    may    be    done    by    preparing 

schedules  outlining  the  contents  of  store-rooms,  taking  as  a  basis  the 
various  classifications  shown  upon  the  store-room  records  in  the 
order  of  their  location  in  the  store-room,  requiring  the  filling  in  of 
the  details  only.  This  preparation  will  also  serve  to  ensure  that 
nothing  is  overlooked. 

(e)  Responsible  arrangements  must  be  made  for  pricing  the  inventory. 

The  best  accounting  practice  requires  that  an  inventory  shall  be 
valued  at  cost,  or  market  value,    whichever   is   lower,   provided   the 

3 

(Lesson  Sixteen) 


market  value  is  not  flagrantly  influenced  by  artificial  conditions, 
which  it  is  known  would  not  hold  if  the  quantity  in  the  inventory 
were  purchased  in  the  market.  If  the  value  of  an  inventory  is  to  be 
reduced  on  account  of  the  market  value  being  lower  than  the  cost 
value,  both  the  values  should  appear  upon  the  Inventory.  In  the 
majority  of  such  cases  the  difference  may  be  expressed  by  a  percent- 
age which  will  probably  be  applicable  to  entire  classifications.  The 
total  reduction  for  each  classification  shown  upon  the  recapitulation 
sheets  would  then  provide  the  means  by  which  the  inventories 
shown  by  the  accounts  (perpetual  inventories)  could  be  brought  into 
agreement  with  the  revised  valuations  shown  by  the  Physical  Inven- 
tory. If  the  reductions  were  not  clearly  accounted  for,  they 
would  assume  an  arbitrary  aspect  not  susceptible  to  an  adequate 
explanation. 

(f)  All  computations  upon  the  sheets  should  be  checked,  and  each  sheet 

should  bear  a  stamped  impress  describing  each  operation  of  the 
work,  each  such  operation  being  initialled  by  the  employee  who  per- 
formed it. 

(g)  When  the  accounting  system  provides  a  control  of  the  classifications 

into  which  an  inventory  is  divided,  comparisons  between  the  book 
and  physical  inventories  should  be  made  as  soon  as  possible  in  order 
that  abnormal  differences  may  be  traced  with  the  least  of  difficulty 
imposed  by  current  changes.  In  this  connection  the  value  of  a  con- 
trolling account  is  very  clearly  illustrated. 

Plant  Asset  Records : 

It  is  not  unusual  to  find  defective  accounting  methods  for  the  fixed  assets 
of  a  Plant.  The  defect  generally  consists  in  representing  the  assets  in  one  ac- 
count upon  the  General  Ledger,  the  account  embracing  Land,  Buildings,  Ma- 
chinery and  General  Equipment.  The  fact  that  Land  is  generally  subject  to 
an  appreciation  in  value,  and  that  Buildings,  Machinery  and  General  Equipment 
are  generally  subject  to  varying  rates  of  depreciation,  suggest  the  necessity  of 
separate  classifications  upon  the  Ledger.  Even  though  separate  classifications 
are  shown  upon  the  Ledger,  further  details  are  required  showing  the  units — 
and  their  values — which  enter  into  each  classification.  The  inadequacy  of  a 
Ledger  Account,  even  when  classified,  to  provide  requisite  information  as  the 
book  value  of  any  particular  unit  may  be  illustrated  by  the  following  details, 
assumed  to  be  applicable  to  an  Iron  Working  plant.  The  General  Ledger  Ac- 
count (often  the  case)  shows  in  one  amount,  a  purchase  of  six. Lathes,  three  of 
which  are  identical,  costing  $3000.00  each,  and  three,  also  identical,  costing 
$1500.00  each,  the  total  cost  of  the  six  Lathes  ($13,500.00)  being  held  upon 
the  Ledger  as  follows: 

Machinery  and  Equipment  Dr.  Cr. 

1910 

Jan.  2.    Johnstone  and  Curry,  6  Lathes  $13,500.00 

Now,  assume  the  following  to  have  occurred: 

(a)  At  December  31,  1919,  one  of  the  large  Lathes  is 

sold  (retired  from  service)  for  $1000.00 

(b)  Depreciation  has  been  credited  to  a  Reserve  Ac- 

count, at  the  rate  of  7^  per  cent  per  annum, 
on  the  original  value,  each  year  for  the  10 
years,  from  January  i,  1910  to  December  31, 
1919. 

* 

(Lesson  Sixteen) 


(c)     The  realized  depreciation  would  be: 

.    Estimated  depreciation  provided  for  $1012.50 

Actual  depreciation  (Cost  $3000.00  less 

residual  value  $1000.00)  $2000.00 

Less  reserve,  as  above  $1012.50        987.50 

Realized  Depreciation  $2000.00 

In  order  that  the  Ledger  Account  may  be  properly  adjusted,  an  analysis  of 
the  charge  of  $13,500.00  w^ould  be  required  to  ascertain  the  original  cost  of  the 
Lathe  which  was  retired  from  service. 

An  analysis  of  the  account  "Reserve  for  Depreciation"  would  also  be  re- 
quired for  the  purpose  of  ascertaining  the  precise  amount  which  was  written 
against  the  book  value  of  the  particular  Lathe  in  question.  In  all  probability, 
it  would  be  necessary  to  refer  to  the  purchase  invoice  to  establish  the  original 
cost  value,  and,  as  a  lapse  of  10  years  has  occurred,  it  may  be  a  difficult — even 
if  possible  matter  to  locate  it. 

The  purpose  of  a  Plant  Asset  Record  is  to  provide  a  complete  history  of 
each  unit  of  the  plant,  in  appropriately  classified  order. 

The  record  would  show  the  date  when  purchased,  from  whom  purchased, 
the  purchase  price,  any  guarantee  as  a  condition  of  the  purchase,  the  cost  of  in- 
stallation, the  location  of  the  unit  in  the  plant,  its  description,  and  the  amount 
periodically  provided  for  depreciation. 

The  record  would  be  controlled  by  the  General  Ledger,  as  to  original 
cost  by  suitably  classified  accounts,  and,  as  to  depreciation  by  suitably  classi- 
fied Reserve  Accounts. 

Applying  the  purpose  of  the  Record  to  the  foregoing  illustration,  its  util- 
ity is  obvious. 

The  book  value  of  the  Lathe,  retired,  from  service,  would  be  instantly 
ascertainable. 

Briefly  stated,  the  general  ledger  accounts  would  show  in  total  the  aggregate 
unit  values  shown  upon  the  record  for  each  classification. 

In  cases  where  a  Plant  Asset  Record  is  applicable,  but  not  in  use,  the  in- 
stallation of  the  Record  is  sufficiently  important  to  warrant  an  appraisal  of 
Plant  Units,  if  their  value  cannot  be  satisfactorily  established  from  the  books 
of  account. 

QUESTIONS  FORMING  THE  SIXTEENTH  EXAMINATION. 

1.  If  a  shortage  of  material  on  hand  is   shown   by   an   inventory,   would   the 

shortage  be  a  justifiable  charge  as  an  item  of  overhead  ?  Give  reasons 
for  your  answer. 

2.  Assuming  a  shortage  of  $1000.00  to  be  shown  by  an  inventory  of  raw  ma- 

terials, classified  in  the  accounts  (Factory  Ledger,  and  Store  Room 
Records)  as  R.  M.  No.  i,  and  the  cause  of  the  shortage  was  undeter- 
mined, what  adjusting  entry  would  you  advise,  the  Factory  Ledger 
being  controlled  by  the  General  Ledger? 

3.  Suppose  the  shortage  (question  N0.2)  was  traced  to  an  error  in  accounting 

for  material  requisitions  issued  during  a  previous  cost  period,  what  ad- 
justments would  you  advise? 

4.  In  a  case  where  numerous  samples   are  given   away  for  advertising,   or 

other  selling  purposes,  what  provision  would  you  make  as  a  means  of 
accounting  for  them? 

(.Lesson  Sixteen) 


5-  If  a  physical  inventory  is  to  be  taken  as  at  close  of  business  Dec.  31,  which 
will  comprise  a  variety  of  small  moveable  items,  what  preparatory 
measures  would  you  take  for  ensuring  the  greatest  possible  degree  of 
accuracy,  assuming  the  factory  operations  are  not  to  be  suspended  whilst 
the  inventory  is  taken? 

6.  If  the  market  value  of  an  inventory  exceeds  the  cost  value  which  of  the 

values  should  be  used  for  pricing  the  inventory?    Why? 

7.  If  the  time  of  workmen  in  a  factory  is  utilized  during  a  dull  period,  for  con- 

structing factory  equipment  at  a  cost  of  $2500.00,  and  similar  equipment 
could  have  been  purchased  in  the  market  for  $2000.00,  which  of  the  two 
values  would  you  charge  as  the  book  value  of  the  asset  so  constructed? 

8.  If  your  answer  to  question  No.  7,  is   the   market  value,   what   disposition 

would  you  make  in  the  accounts  of  the  difference  between  the  two 
values  ? 

9.  If  a  machine  in  department  A  is  transferred  to  department  B,  involving 

the  following  expenditures: 

Labor — Removal  from  A  to  B. 

Disengaging  from  foundation  in  A  $35-00 

Transferrins:  machine  to  B  18.00 


'& 


Foundations. 

Foundation  in  A  destroyed,  book  value  $75-oo 

Foundation  in  B  cost  275.00 

How  would  you  adjust  the  asset  accounts,  assuming  there  are  no  other 
considerations  involved? 

10.  Suppose  all  the  machines  in  a  department  were  transferred  to,  and  in- 
stalled in,  another  department,  how  would  you  compile  the  costs  of  the 
transfer? 


^Lesson  Sixteen) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


SEVENTEENTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


V        3J 


SEVENTEENTH  LESSON 

SUBJECT:     MATTERS  REQUIRING  CAREFUL  CONSIDERATION  IN 
THEIR  RELATION  TO  A  COST  SYSTEM. 

(Collateral  reading,  chapter  24.) 

The  student  has  previously  been  made  aware  of  the  fact  that  no  two  in- 
dustries— even  though  of  the  same  kind — are  conducted  in  such  an  identical 
manner,  as  that  the  same  cost  system  would  apply  to  both.  The  Cost  Account- 
ant will  be  required  to  provide  special  means  for  dealing  with  the  varying 
conditions  which  will  most  certainly  be  encountered  in  every  system  he  may 
devise,  which  means,  that  he  must  have  a  thorough  knowledge  of  the  princi- 
ples, and  methods  for  their  application. 

This  knowledge,  coupled  with  a  reasonable  degree  of  business  sagacity  will 
enable  him  to  provide  a  system  which  will  meet  the  requirements  of  any 
industry.  A  competent  Cost  Accountant  will  know  that  a  cost  system  must 
conform  to  the  requirements  of  a  business,  he  will,  therefore,  carefully  avoid 
any  attempt  to  conform  the  business  to  the  requirements  of  a  cost  system. 

The  competent  Cost  Accountant  will  avoid  unnecessary,  or  injudicious, 
clerical  work,  that  is,  he  will  not  require  clerical  work  which  is  disproportion- 
ate to  the  value  of  the  information  gained.  For  instance,  the  question  will 
often  arise  as  to  the  extent  to  which  clerical  effort  should  be  employed  in  deter- 
mining whether  a  cost  shall  be  treated  as  a  direct  cost,  or  as  an  indirect  cost. 
In  these  cases,  as  a  rule,  the  correct  procedure  will  be  determined  by  the  im- 
portance of  the  matter  with  respect  to  its  effect  upon  the  costs  of  the  factory. 
If  the  results  involved  do  not  warrant  the  effort  to  distinguish  between  the  two 
classifications,  by  all  means  follow  the  practical  course,  and  classify  the  cost 
as  indirect. 

The  head  of  a  Cost  Department  may  confidently  expect  to  receive  the 
respect  and  appreciation  of  Executives  and  Managers,  in  direct  proportion  to 
the  value  of  the  information  which  they  receive  from  a  Cost  System.  This 
implies  a  necessity  for  conferring  with  Executives  and  Managers,  for  the  pur- 
pose of  ascertaining  their  requirements,  before  planning  the  system,  to  the  end 
that  provision  may  be  made  for  statistical  information  of  a  special  character. 
In  a  general  way,  the  information  required  from  a  cost  system  will  be  embraced 
by  Financial  Statements  and  Operating  Statements  covering  each  principal 
operation,  each  department,  and  the  Factory  as  a  whole. 

If  a  cost  system  imposes  an  unreasonable  amount  of  clerical  work  upon 
factory  employees,  thereby  unduly  interfering  with  routine  work,  the  system 
will  assuredly  be  a  failure. 

This  possibility  should  be  avoided  by  conferring  with  managers  and  foremen, 
for  the  purpose  of  discussing  suggestions  they  may  be  able  to  make  from  actual 
experience.  It  must  always  be  conceded  that  their  familiarity  with  existing 
conditions  enables  them  to  offer  suggestions  which  are  entitled  to  respect. 

In  most  cases,  parts  of  an  existing  system  will  be  found  to  possess  such 
merit  as  that  they  may  be  advantageously  incorporated  in  a  system  which  it  is 
proposed  to  install.    Other  parts,  with  slight  changes,  may  be  similarly  used.    It 

{Lesson  Seventeen) 


may  be  taken  as  a  certainty  that  whenever  such  adaptations  are  possible,  and 
are  taken  advantage  of,  to  that  extent  the  friction  inevitable  with  a  new  system 
will  be  removed. 

We  do  not,  of  course,  advocate  the  abandonment  of  any  vital  principle  in 
order  to  secure  this  result.  We  do,  however,  wish  to  impress  upon  the  student 
the  fact  that  cases  are  rare  in  which  an  existing  cost  system  is  absolutely 
destitute  of  good  points  which  may  be  advantageously  used  in  providing  an 
improved  system. 

Careful  consideration  must  be  given  to  making  the  necessary  preparations 
for  putting  a  cost  system  in  operation. 

Assuming  that  the  proposed  system  is  the  result  of  the  Cost  Accountant's 
skill,  aided  by  the  practical  experience  of  qualified  employees,  the  necessity 
remains  for  issuing  instructions — preferably  in  written  form — to  the  various 
managers,  foremen,  and  clerks  who  will  be  brought  in  contact  with  the  opera- 
tion of  the  system.  After  they  have  had  an  opportunity  to  study  the  instruc- 
tions, the  Cost  Accountant  should  personally  confer  with  them  for  the  purpose 
of  discussing  any  points  they  may  not  clearly  understand,  and  for  considering 
any  suggestions  they  may  make. 

If  the  Cost  Accountant  proceeds  in  the  manner  outlined  by  the  foregoing, 
he  will  accomplish  better  results  than  if  he  goes  upon  the  assumption  that 
nothing  possesses  merit  which  is  not  of  his  personal  creation. 

QUESTIONS  FORMING  THE  SEVENTEENTH  EXAMINATION. 

To  what  extent  is  a  cost  system  applicable  to  a  mercantile  business,  that 
is,  a  business  conducted  solely  for  buying  and  selling? 

What  are  the  three  prominent  divisions    which    constitute    factory    ex- 
penditures? 

From  what  principal  sources  are  the  expenditures,  referred  to  in  question 
2,  obtained? 

4.  What  is  the  procedure  in  accounting  for  production? 

5.  Referring  to  the  application  of  overhead,  prior  to  its  distribution  to  prod- 

uct, how  would  you  apply  the  following: 

(a)  Overhead  applicable  to  a  process  operation? 

(b)  Overhead  applicable  to  a  department    in    which    several    distinct 

operations  may  be  carried  on  ? 

(c)  Overhead  of  a  non-productive  department? 

(d)  Overhead,  represented  by  general  operating  expenses? 

6.  Describe  the  procedure  and  object  of  costing  the  sales? 

7.  State  concisely,  but  clearly,  why  factory  transactions  must  be  summarized 

at  the  end  of  each  cost  period? 

8.  What  proof  is  it  possible  to  make,  at  the  end  of  each  cost  period,  with 

respect  to: 

(i)     Stores  of  Raw  Materials? 

(2)  Work  shown  to  be  in  Process? 

(3)  Stores  of  part  finished  Stock? 

(4)  Stores  of  finished  Stock? 

'4 

•;_.  •  ,  {Lesson  Seventeen) 


g.     If  a  separate  factory  ledger  is  kept,  how  would  you  prove  its  mathematical 
accuracy,  assuming  that  the  ledger  was  not  self-balancing? 

10.  What  precautions  would  you  take  for  establishing  the  accuracy  of  Fac- 

tory Ledger  Balances  before  using  a  Trial  Balance  as  a  basis  for  the 
preparation  of  financial  statements? 

11.  Assuming  you  were  required  to  prepare  a  cost  system,  what  procedure 

would  you  adopt  from  the  commencement  to  the  completion  of  your 
duties?      Arrange  your  answer  in  natural  order  of  sequence. 

12.  If  you  were  required  to  install  the  cost  system,  referred  to  in  question 

No.  II,  what  procedure  would  you  adopt?     Arrange  your  answers  in 
natural  order  of  sequence. 


{Lesson  Seventeen) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


EIGHTEENTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


'\kQ'/:. 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


u:ym 


EIGHTEENTH  LESSON 

SUBJECTS:    EXAMINATION  OF  A  PLANT  AS  A  PREREQUISITE  TO 

DEVISING  A  COST  SYSTEM.   CONSIDERATIONS  AFFECTING 

THE  INSTALLATION  OF  A  COST  SYSTEM. 

(Collateral  reading,  chapters  25  and  26.) 

We  have  previously  stated  that  any  attempt  to  employ  a  Cost  System 
which  does  not  conform  to  the  particular  conditions  existing  in  the  Plant,  will 
assuredly  result  in  failure. 

The  risk  of  such  an  eventuality  is  reduced  by  making  a  systematic  and 
thorough  study  of  the  conditions  before  formulating  a  system.  This  procedure 
is  covered  by  the  expression  "Examination  of  a  Plant." 

At  the  outset,  a  clear  understanding  should  be  had  with  the  management  as 
to  the  scope  which  the  proposed  system  is  to  cover.  In  this  connection  it  is 
not  to  be  assumed  that  the  examining  accountant  is  to  be  entirely  led  by  the 
wishes  of  the  management.  Managers,  as  a  rule,  are  not  trained  in  accounting 
detail,  and  it  will  generally  be  the  case  that  the  accountant  can  make  suggestions 
which  managers  will  welcome.  In  fact,  this  is  one  of  the  primary  objects  to  be 
gained  by  employing  the  services  of  a  Cost  Accountant.  On  the  other  hand,  it 
is  generally  the  case  that  managers  are  largely  influenced  by  a  desire  to  reduce 
clerical  expenses.  Unuseful,  or  unrequired  detail  is,  of  course,  to  be  avoided, 
but,  no  detail  should  be  omitted  which  is  required  for  expressing  a  vital 
principle. 

The  procedure  herein  outlined,  for  the  examination  of  a  Plant,  is  one  gener- 
ally applicable. 

A  plant  may  be  operated  with  a  greater  or  lesser  number  of  departmental 
divisions,  the  principles,  however,  remain  unchanged. 

In  the  course  of  an  examination,  a  watchful  alertness  should  be  maintained 
for  evidence  of  inefficient,  extravagant,  or  careless  methods.  Such  derelictions 
should  be  carefully  noted,  even  though  they  occur  in  connection  with  matters 
which  have  only  an  incidental  bearing  upon  the  examination.  For  instance,  care- 
less methods  may  be  noticed  in  the  store-rooms.  Stores  may  not  be  carefully 
segregated,  or  placed  on  shelves  or  in  bins.  They  may  be  scattered  upon  the 
store-room  floor.  Scrap  material  may  be  indiscriminately  piled  without  refer- 
ence to  its  separate  values.  Iron,  copper,  zinc,  lead,  all  have  a  separate  scrap 
value.  If  piled  together,  they  must  be  separated  and  graded  before  it  is  pos- 
sible to  dispose  of  them  to  advantage. 

Any  economies  resulting  from  the  accountants  observation  will  tend  to 
strengthen  the  confidence  of  the  management  in  his  efforts. 

The  accountant  should  proceed  upon  the  theory  that  it  is  impossible  to 
obtain  too  much  information,  and  that  a  system  which  is  based  upon  insuffi- 
cient information  stands  in  peril  of  failure,  therefore,  the  information  must 
be  of  the  fullest  character  possible,  and  it  must  be  compiled  clearly  and  sys- 
tematically, each  subject  being  kept  quite  separate.  For  this  purpose,  a  loose- 
leaf  note  book  would  be  appropriate.  The  subjects,  and  notations  may  then  be 
filed  and  indexed  in  any  order  in  which  they  are  to  be  dealt  with  in  formulating 
the  system. 

3 

{Lesson  Eighteen) 


The  examination  should  take  a  course  which,  as  nearly  as  possible,  co- 
incides with  the  manufacturing  routine  of  the  Plant,  which  would  usually  be 
the  following: 

(i)     The  Receiving  Department: 

An  examination  of  this  department  would  extend  to  the  manner  in  which 
the  department  is  advised  of  incoming  merchandise,  the  manner  in  which  ar- 
rived merchandise  is  accounted  for,  the  forms  of  records  used,  the  duties  per- 
formed by  each  employee  of  the  department,  and  to  the  question  of  proper 
responsibility  attaching.  The  manner  in  which  the  department  surrenders  the 
merchandise  should  be  similarly  investigated.  Incoming  raw  materials,  sup- 
plies, returns  from  customers,  in  fact,  all  purchases  and  inward  returns  will 
usually  pass  through  the  department;  its  importance  therefore,  will  be  immedi- 
ately perceived. 

(2)     Store-Room  Department: 

The  continuity  of  movement  will,  with  few  exceptions — such  as  delivering 
incoming  material  directly  to  a  factory  operation — be  from  the  receiving  de- 
partment to  the  store  room,  the  latter  is  therefore  the  next  subject  for  attention. 

The  examination  would  be  particularly  concerned  with  the  manner  in  which 
the  stores  are  housed,  the  facilities  provided  for  keeping  various  classifications 
separate,  the  existing  classifications,  existing  records  for  incoming  stores,  out- 
going stores,  stores  on  hand,  and  the  procedure  followed  in  delivering  any  part 
of  the  stores  to  the  operating  departments,  or  for  shipment.  Responsibility 
for  safe  custody  of  the  stores,  is  a  very  important  consideration,  the  examina- 
tion should  therefore  be  directed  to  it  somewhat  upon  the  following  lines : 

(a)  Does  the  responsibility  attach  exclusively  to  one  person? 

(b)  If  so,  by  what  means  is  it  accomplished? 

(c)  If  two  or  more  employees  are  engaged  in  the  department,  what  are 

their  individual  duties? 

(d)  Are  employees,  engaged  in  other  departments,  admitted  to  the  store 

rooms  ? 

If  the  existing  system  has  been  in  any  manner  controlled  by  the  books  of 
account,  or  if  the  stores  records  have  provided  a  perpetual  inventory,  though  not 
controlled,  information  should  be  obtained  as  to  how  the  perpetual  inventory 
has  compared  with  the  last  three  or  four  physical  inventories.  A  blank  of  each 
form  used  by  the  department  should  be  filed  with  the  Accountant's  notes. 

After  his  examination  of  the  Store-Room  Department,  the  accountant  will 
be  familiar  with  the  forms  of  requisition  issued  by  the  operating  departments. 
Adhering  to  the  continuity  in  movement  of  materials,  his  attention  should 
next  be  directed  to  the  operating  departments,  commencing  with  the  initial 
operation  and  proceeding  with  each  successive  operation  until  the  product  is 
finally  withdrawn  from  operation,  as  finished  or  part  finished  stock.  A  study 
of  factory  operations  is,  in  eflPect,  a  study  of  productive  routine.  The  object 
sought  is  the  determination  of  points,  or  divisions  at  which  the  costs  may  be 
collected  with  a  greater  degree  of  accuracy  than  would  be  possible  if  such 
points,  or  divisions  were  not  established,  and  aflfording  a  means  of  comparing 
the  costs  of  similar  operations  for  varying  periods. 

A  well  planned  classification  of  operating  divisions  will  enable  the  direct  ap- 
plication of  expenditures  which  otherwise  would  be  classed  as  General  Over- 
head. 

4 

(Lesson  Eighteen) 


After  determining  a  point,  or  division,  which  constitutes  an  operation,  a 
careful  examination  of  the  attaching  conditions  should  be  made,  such  for  in- 
stance as: 

(a)  Is  the  operation  under  special  supervision,  or  is   supervision   lodged 

w^ith  an  operative? 

(b)  Is  the  operation  (as  in  the  case  of  a  casting  produced  in  a  foundry)  to 

appear  separately  upon  the  Sales  Invoice,  or  is  it  one  of  several  pro- 
gressive operations,  which,  as  finished  product  is  to  be  billed  by 
units  ? 

(c)  What  part  of  the  operation  is  done  by  machine,  and  what  part  by  hand? 

(d)  Does  the  operation  require  varying  degrees  of  skill  in  hand  labor,  or 

in  operating  the  machine? 

(e)  Are  the  materials  requisitioned  as  required  for  definite  quantities  of 

product  to  be  operated  upon,  or  are  they  requisitioned  in  bulk,  to  be 
used  as  required? 

(f)  How  many  operatives  does  the  operation  require  and  what  are  the 

duties  of  each? 

The  suggested  information  will  enable  the  accountant  to  devise  the  system 
by  which  the  costs  of  the  operation  are  to  be  reported. 

The  skill  required  in  devising  a  Cost  System  receives  its  most  severe  test 
from  the  manner  in  which  the  system  recognizes,  and  deals  with  the  develoo- 
ment  of  the  product,  by  natural  manufacturing  stages,  until  the  completed  stage 
is  reached.  Manufacturers,  as  a  rule,  estimate  costs  from  the  bases  of  the 
various  operations  through  which  the  product  passes. 

It  will  be  apparent  to  the  student  that  a  thorough  technical  knowledge  of 
the  business  under  examination  is  necessary,  and  that  the  manufacturing  con- 
ditions of  that  particular  business  must  also  be  understood,  the  examining  ac- 
countant therefore  should  not  entirely  rely  upon  his  own  observations  in  his 
progress  through  the  plant.  He  should  be  accompanied  by  an  executive  or  em- 
ployee who  is  competent  to  explain  and  discuss  the  factory  routine. 

Having  now  completed  his  examination  of  the  Receiving,  Store-room  and 
Operating  Departments  of  the  Plant,  the  accountant  may  turn  his  attention  to 
contributory  departments,  such  as.  Purchasing,  Engineering  and  Drafting,  Pat- 
tern Making,  Mechanical  or  Repairing,  Planning  and  Routing,  Employment, 
Tool-room,  Selling,  Shipping,  and  Power  Plant.  These  departments  must  be 
examined  for  the  same  purpose  and  much  in  the  same  way,  as  those  previously 
referred  to,  the  object  being  to  ascertain  the  methods  under  which  they  are  con- 
ducted, as  to  personnel  of  the  employees,  their  duties,  the  accounting  details, 
and  to  provide  classifications  for  ascertaining  the  costs. 

The  system  of  wage  payment,  reporting  labor,  and  preparing  the  Pay-rol.l, 
will  then  require  attention.    These  subjects  are  closely  allied. 

The  system  of  wage  payment  will,  to  some  extent,  govern  the  form  of  labor 
reports  to  be  used,  and  the  manner  in  which  labor  is  reported  will  influence  pay- 
roll construction. 

The  examination  should  extend  to  the  entire  area  of  the  plant,  that  is,  outside 
areas — spaces  not  occupied  by  shops — such  areas  are  generally  found  to  be 
gathering  ground  for  nondescript  materials,  scrap  machinery,  etc.,  etc. 

Finally  the  examination  will  terminate  with  the  General  Offices,  and  the 
Cost  Department. 

5 

(.Lesson  Eighteen) 


At  these  points,  the  accountant  has  an  opportunity  to  study  the  executive 
organization.  He  should  ascertain  the  duties  and  responsibilities  of  each 
executive  and  clerk,  how  the  duties  relate  to  the  various  activities  of  the  Plant, 
and  to  what  extent,  if  any,  proper  co-ordination  is  lacking. 

The  General  and  Cost  Accounting  systems  must  be  carefully  studied,  to  as- 
certain the  extent  to  which  control  of  factory  accounts  is  provided,  and  as  to 
the  forms  of  financial  and  statistical  statements  which  it  has  been  the  custom 
to  render,  and  the  periods  covered  by  such  statements.  In  this  connection,  the 
existing  system  of  billing  sales  should  receive  careful  attention.  A  more 
efficient  system  may  be  possible  by  using  one  of  the  several  multiplex  methods 
now  available. 

As  previously  stated,  an  examination  cannot  be  too  thorough.  The  account- 
ant should  enter  upon  the  task  with  the  determination  to  leave  nothing  un- 
done which  may  weaken  the  value  of  the  system  to  be  devised.  The  accomplish- 
ment of  his  purpose  will  largely  depend  upon  the  taking  of  logically  connected 
lines  of  progression  from  the  commencement  to  the  end  of  the  examination. 

As  a  final  admonition,  we  would  point  out  the  importance  of  being  abso- 
lutely sure  that  the  examination  has  covered  all  of  the  usual  activities  of  the 
plant.  It  may  be  the  case  that  at  the  time  of  making  the  examination, 
certain  lines  of  product  were  not  in  operation,  owing  to  the  limitations  of  a 
particular  season  of  the  year.  To  guard  against  this  possibility,  and  to  bring 
changing  manufacturing  conditions  under  observation,  the  examination  should 
extend  to  the  records  of  the  plant  for  a  full  year. 

Considerations  Affecting  the  Installation  of  a  Cost  System: 

We  have  previously  referred  to  the  preparatory  measures  in  connection  with 
factory  routine,  which  should  precede  the  installation  of  a  cost  system.  In  addi- 
tion, there  are  certain  preparatory  steps  to  be  taken  in  connection  with  the  ac- 
counting routine. 

The  first  of  these  relates  to  the  beginning  inventory,  which  should  be  repre- 
sented by  a  most  carefully  taken  Physical  Inventory,  which  should  be  recon- 
ciled with  the  stores  records  and  controlling  acounts.  The  inventory  should 
then  be  classified  in  conformity  with  the  classifications  provided  by  the  system. 
If  stores  records,  or  controlling  accounts,  have  not  previously  been  kept,  it 
will  be  necessary  to  commence  them. 

If  there  is  any  work  in  process  in  the  beginning  inventory,  classifications 
will  be  required  which  conform  to  those  provided  by  the  system,  and  cost  sheets 
must  be  prepared  to  cover  them.  This  requirement  relates  to  unfinished  work 
under  either  the  special  order  or  process  method  of  cost-finding. 

If  fixed  percentages  for  overhead  distribution  have  previously  been  used,  it 
will  be  necessary  to  carefully  consider  their  applicability  to  the  new  system, 
revising  them  if  necessary.  If  no  systematic  method  was  previously  employed 
for  distributing  overhead,  it  will  be  necessary  to  examine  the  accounting  records 
of  past  periods  for  the  purpose  of  establishing  percentages  to  be  used  with  the 
new  system. 

Thereafter,  the  installation  will  be  completed  by  putting  into  use  such  books 
of  account,  factory  orders,  forms  of  factory  and  accounting  reports,  as  the  system 
may  require. 

6 

{Lesson  Eighteen) 


QUESTIONS  FORMING  THE  EIGHTEENTH  EXAMINATION. 

1.  In  the  course  of  examining  a  plant,  you  find  that  the  cartages  required 

for  the  receiving  and  shipping  departments  are  made  by  trucks  owned 
and  operated  by  the  factory,  and  by  trucks  owned  and  operated  by  cart- 
age contractors,  under  a  contract  with  the  factory.  Assuming  it  is  not 
practicable  to  restrict  the  cartage  which  each  facility  is  to  do,  would 
you  consider  it  necessary  to  separately  account  for  the  cartage  done  by 
the  facility  owned  and  operated  bv  the  Factory?  Give  the  reasons  which 
would  influence  you  in  dealing  with  the  matter. 

2.  Scrap  metal  is  often  a  source  from  which  considerable  revenue  is  derived, 

by  using  it  productively  in  the  factory,  and  by  selling  it.  Give  a  concise 
outline  of  the  methods  you  would  employ  for  storing  scrap  and  ac- 
counting for  scrap  used,  and  scrap  sold. 

3.  In  determining  product  classifications,  which  department  executive  would 

you  consider  it  wise  to  consult? 

4.  If  your  conference  with  executives  developed  the  fact  that  they  held  very 

different  ideas  as  to  the  scope  which  a  proposed  cost  system  should 
cover,  what  course  would  you  follow? 

5.  Assuming  you  are  devising  a  Cost  System  and  that  you  find  the  plant 

assets  are  stated  upon  the  accounting  records  in  one  amount,  as  "Ma- 
chinery, etc."  what  object  would  you  endeavor  to  attain  with  respect 
to  the  account? 

6.  Assuming  a  cost  system  is  to  be  installed,  and  that  the  beginning  inven- 

tory shows  the  following: 

Raw  materials  "R.  M.  i"  store-room  No.  i  $20,000.00 

Raw  materials  "R.  M.  2"  store-room  No.  i  8,000.00 

Finished  Product  "p.  3"  12,000.00 

Finished  Product  "p.  5"  14,000.00 

Work  in  process  "p.  5"  Materials  6,000.00 

Work  in  process  "p.  5"  Labor  8,000.00 

Work  in  process  "p.  5"  Overhead  1,200.00 

Part-finished  product  "A"  (Held  in  store-room)  3,000.00 

$72,200.00 

How  would  you  deal  with  the  Inventory  in  connection  with  the  installa- 
tion, assuming  the  classifications  to  be  correct  and  that  a  factory  ledger 
(not  previously  in  use)  is  to  be  installed. 

7.  Explain  why  predetermined  percentage  rates  are  used  for  distributing  over- 

head. 

8.  State  your  understanding  of  overhead  cost,  its  application,  its  liquidation 

by  means  of  predetermined  percentages,  and  final  disposition  of  any 
difference  which  the  predetermined  percentages  did  not  exactly 
liquidate? 


(,Lesson  Eighteen) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


NINETEENTH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


i..,)l 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


NINETEENTH  LESSON 

SUBJECT:    ELEMENTARY  COST  SYSTEMS. 
(Collateral  reading,  chapter  27.) 

Occasions  will  be  met  with,  in  which  a  manufacturer  does  not  favor  the  in- 
stallation of  a  cost  system  sufficiently  detailed  to  provide  a  perpetual  inventory, 
yet,  he  requires  a  monthly  financial  statement  exhibiting  the  results  of  his  busi- 
ness, as  nearly  approximating  actual  conditions  as  may  be  possible.  Any  system 
by  which  this  is  accomplished  would  be  considered  an  elementary  system. 

If  the  material,  labor,  and  overhead  costs  in  a  factory  are  constant  in  their 
relation  to  the  selling  price  of  the  product,  that  is,  if  any  fluctuations  in  these 
costs  are  reflected  in  similar  changes  in  the  selling  price  of  the  product,  the 
gross  profit  (over  manufacturing  cost)  will  be  constant.  If  this  is  the  case,  it 
will  be  possible  to  satisfactorily  determine  the  percentage  which  the  gross 
profits  bears  to  the  sales,  from  which  the  cost  of  the  sales  may  be  approxi- 
mately determined.  If  the  cost  of  the  sales  is  approximately  determined,  it 
will  be  possible  to  approximately  determine  the  value  of  a  merchandise  in- 
ventory monthly,  or  at  the  end  of  a  cost  period,  by  deducting  the  cost  of  the 
sales  from  the  total  manufacturing  charges,  including  the  amount  of  the  be- 
ginning inventory.  Finally,  if  the  ending  merchandise  inventory  is  approxi- 
mately determined,  estimated  financial  statements  may  be  prepared. 

The  following  illustration  will  serve  to  make  the  procedure  clear: 
Assume  that  a  physical  inventory  taken  at  the  end  of  a  year  shows  a  value 
of  $125,500.00,  and  estimated  monthly  inventory   is   thereafter  to  be  made  so 
that   monthly  financial   statements   may  be  made  during  the  year,  until  another 
physical  inventory  is  taken. 

Assume  also  the  following: 

Purchases  during  the  first  month  were  $32,750.00 

Productive  Labor  Cost  was  20,120.00 

Factory  Overhead  Cost  was  3,840.00 

The  Sales  amounted  to  73,860.00 

The  gross  profit  during  the  previous  year  was  38  per  cent  of  the  sales.  From 

the  above  stated  details,  the  ending  inventory  would  be  estimated,  as  follows: 

Merchandise  Inventory  at  commencement  of  the  period  $125,500.00 

Add: 

Charges  during  the  period: 

Merchandise  Purchases  $32,750.00 

Productive  Labor  20,120.00 

Factory  Overhead  3,840.00  56,710.00 

Total  Factory  charges  during  the  period.  $182,210.00 

Deduct: 

Estimated  Cost  of  Sales,  62  per  cent  of  $73,860.00  $45,793.20 

(The  Gross  Profit  for  the  previ- 
ous year  is  stated  as  38  per  cent, 
therefore  the  Cost  of  the  Sales 
was  62  per  cent.) 

Estimated  value  of  the  Ending  Inventory  $136,416.80 

•3 

{Lesson  Nineteen) 


The  establishing  of  a  value  for  the  ending  inventory  would  enable  the  prep- 
aration of  an  estimated  statement  of  Assets  and  Liabilities,  and  an  estimated 
Manufacturing  and  Profit  and  Loss  Statement.  The  qualification,  estimated, 
is  necessary  in  connection  with  financial  statements  prepared  from  an  inven- 
tory arrived  at  in  the  foregoing  manner,  as  an  explanation  of  the  fact,  that  the 
statements  are  based  upon  an  estimate. 

The  estimate  in  the  illustration  is  confined  to  the  cost  of  the  sales.  The  accu- 
racy of  the  profit  shown  by  a  financial  statement  would  depend  upon  the  accu- 
racy with  which  the  gross  profit  of  38  per  cent,  shown  for  the  previous  period, 
represents  the  gross  profit  for  the  current  period.  Our  meaning,  when  we  stated 
that  manufacturing  costs  must  be  constant,  in  their  relation  to  selling  prices — 
will  now  be  clear.  If  the  costs  do  not  exhibit  the  requisite  constancy,  the  esti- 
mated inventory  will  be  relatively  inaccurate,  the  extent  of  such  inaccuracy 
being  ascertainable  only  when  the  next  physical  inventory  is  taken. 

The  method  described  above  may  be  used  in  cases  where  various  lines  of 
product  are  manufactured,  provided  classifications  are  established  for  inven- 
tories, departments,  and  product.  Records  would  be  also  required  showing  ma- 
terials and  supplies  requisitioned,  and  used  by  each  department,  the  object  being 
to  apply  the  percentage  of  gross  profit  (as  in  the  illustration)  to  each  depart- 
ment, or  line  of  product,  thereby  making  it  possible  to  estimate  the  cost  of  the 
sales  of  each,  resulting  in  an  estimated  inventory  for  each  merchandise  classifi- 
cation. 

A  complete  cost  system  would  require  an  ascertainment  of  the  cost  of  each 
sales  invoice,  whereas — if  the  requisite  conditions  of  constancy  exist — a  suffi- 
ciently approximate  statement  may  be  arrived  at  by  the  illustrated  method, 
which  deals  only  with  the  total  sales  of  each  classification,  and  it  eliminates  the 
clerical  work  involved  in  keeping  a  perpetual  inventory  upon  the  Stores  records. 

Estimated  inventories  are  of  course,  subject  to  verification  by  frequent  in- 
ventory tests  between  the  taking  of  physical  inventories.  This  measure  of  proof 
should  be  utilized  to  the  fullest  possible  extent. 

QUESTIONS  FORMING  THE  NINETEENTH  EXAMINATION. 

1.  Assuming  that  a  cost  system  does  not  provide  a  perpetual  inventory,  or 

detailed  costs  from  which  the  cost  of  sales  may  be  determined,  and  that 
the  last  physical  inventory  was  taken  as  at  Dec.  31,  1919,  would  it  be 
possible  to  prepare  satisfactory  financial  statements  as  at  Jan.  31,  1920, 
from  a  trial  balance  at  that  date?    Explain. 

2.  Referring  to  the  previous  question,  if  financial  statements  were  possible, 

how  would  you  designate  them,  assuming  they  are  a  Balance  Sheet,  and 
Manufacturing  and  Profit  and  Loss  Statement,  and  what  items  thereon 
would  you  particularly  qualify? 

3.  What  are  the  conditions  which  must  exist  in  order  that  an  estimated  in- 

ventory may  be  reasonably  approximate? 

4.  Would  the  undermentioned  items  give  you  all  requisite  information  from 
which  to  estimate  a  merchandise  inventory? 

(a)  The  Beginning  Inventory. 

(b)  Merchandise  Purchases. 

(c)  Productive  Labor  Charges 

(d)  Overhead  Charges 

(e)  The  Sales 

■4 

(Lesson  Nineteen) 


5-  Referring  to  question  No.  4,  if  your  answer  is  in  the  affirmative,  explain 
how  your  estimate  would  be  made.  If  your  answer  is  in  the  negative, 
explain  why  you  would  be  unable  to  make  the  estimate. 

6.  What  are  the  business  conditions  to  which  an  elementary  unit  method  for 

ascertaining  costs  is  particularly  applicable? 

7.  Assume  the  following: 

Sales  during  the  year  1919  $36o,(XX).oo 

Cost  of  the  Sales  270,000.00 

Gross  Profit  90,000.00 

Merchandise  Inventory,  Dec.  31,  1919  120,000.00 

and  the  following  Factory  Expenditures  for  January,  1920: 

Merchandise  Purchases  $40,000.00 

Productive  Labor  Charges  15,000.00 

Overhead  Charges  3,000.00 

and  the  Sales  for  January  were  $30,000.00 

.    show  how  you  would  estimate  the  Merchandise  Inventory  at  January  31, 
1920. 

8.  Without  going  into  the  detailed  arrangement  of  records  required,  briefly 

describe  two  methods,  by  which  the  units  required  for  arriving  at  unit 
costs,  may  be  systematically  ascertained. 


{Lesson  Nineteen) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE| 


TWENTIETH  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


■  ^ 


/rt 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


I  H 


TWENTIETH  LESSON 

SUBJECT:    ESTIMATING  COST  SYSTEMS.     (Collateral  reading,  chapter 
No.  28.) 

An  Estimating  Cost  System  is  an  elementary  system,  its  purpose  being  to 
verify  estimated  cost  details  without  the  employment  of  a  detailed  cost  system. 
The  verification  is  accomplished  by  actually  accounting  for  the  total  cost,  or 
for  each  element  of  cost  which  has  entered  into  the  estimated  cost. 

Estimated  costs  based  upon  previous  costs,  modified  by  current  conditions, 
are  incorporated  in  the  accounting  system  by  means  of  classifications  which  con- 
form to  the  classifications  used  in  the  estimated  costs,  thus  providing  for  a  com- 
parison of  the  estimated  and  actual  results. 

The  utility  of  an  estimating  cost  system  is  confined  to  the  manufacture  of 
a  distinct  article,  or  group  of  articles,  continuously  being  made. 

By  way  of  illustrating  an  estimating  cost  system,  in  its  simplest  form,  we 
will  consider  it  in  connection  with  an  industry  producing  a  single  article,  the 
estimated  cost  of  which  is  scheduled  as  follows: 

Schedule  of  Estimated  Cost  for  a  Single  Article 

Cost  of  Materials  $1.26 

Labor  Cost  .84 

Overhead  Cost  .16 

Total  Estimate  Cost  $2.26 

Having  prepared  the  Schedule  of  Estimated  Costs,  shown  above,  the  proce- 
dure for  operating  the  estimating  system  would  be  as  follows: 
Assuming  the  Commencing  Inventory  to  show: 

Materials  in  Store-room  $12,600.00 

500  Finished  Articles  on  Hand. 

1000  Unfinished  Articles  in  Process  of  Manufacture, 
in  the  following  Stages  of  Completion: 

60  per  cent,  as  to  Materials 

45  per  cent,  as  to  Labor 

10  per  cent,  as  to  Overhead 

From  these  details,  using  the  Schedule  of  Estimated  Costs  as  a  basis,  the 
commencing  inventory  would  take  the  following  form : 

Analysis  of  Commencing  Inventory 


Description 

Total 

Materials 

Labor 

Overhead 

Materials  (Store-room) 

$12,600.00 

$12,600.00 

Finished  Articles  on  Hand 

1,130.00 

630.00 

$420.00 

$80.00 

Uncompleted  Articles 

$1,150.00 
$14,880.00 

756.00 

378.00 

16.00 

Analyzed  Inventory 

$13,986.00 

$798.00 

$96.00 

The  next  step  is  to  arrive  at  the  Estimated  Cost  of  Sales,  using  as  the  basis 
the  Schedule  of  Estimated  Costs  previously  shown.  Assuming  the  sales  to  have 
been  2,000  articles,  the  estimated  cost  of  the  sales  would  take  the  following 
form: 

'3 

(Lesson  Twenty) 


Estimated  Cost  of  Sales 

Description  Total  Materials  Labor        Overhead 

2000  Articles  $4,520.00         $2,520.00         $1,680.00         $320.00 

In  order  to  provide  a  comparison  between  the  Estimated  and  Actual  Costs, 
we  will  assume  the  following  to  have  been  the  remaining  transactions : 

Material  Purchased  $6,220.70 

Labor  Cost  (wages  paid)  2,922.80 

Overhead  Expenses  606.50 

The  Ending  Inventory  is  assumed  to  show: 

Materials  in  Store-room  $14,360.00 

Finished  Articles  on  Hand  2,000 

Unfinished  Articles  in  Process  1,000 

completed  as  to: 

Materials  65  per  cent. 
Labor  42  per  cent. 
Overhead  35  per  cent. 

An  analysis  of  the  ending  inventory  would  show  the  following  details,  based 
upon  the  schedule  of  estimated  costs. 

Analysis  of  the  Ending  Inventory 

Description  Total  Materials  Labor  Overhead 

Materials  (Store-room)  $14,360.00  $14,360.00 

2000  Finished  Articles  4,520.00  2,520.00  $1,680.00  $320.00 

1000  Unfinished  Articles  1,227.80  819.00  352.80  56.00 

Analyzed  Inventory  $20.107.80  $17,699.00  $2,032.80  $376.00 

Turning  our  attention  to  the  verification  of  the  Estimated  Costs,  we  find 
the  Ledger  Accounts,  show  the  following: 

Ledger  Accounts ^ Dr\ Cr. 

Materials: 

Inventory  at  Commencement,  per  analysis 
Purchases  during  the  Period 
Credit,  per  Estimated  Cost  of  Sales 
Ending  Inventory,  per  analysis 
Difference  (Cost  over-estimated) 


Labor : 

Inventory  at  Commencement,  per  analysis 
Wages  paid  during  the  Period 
Credit,  per  Estimated  Cost  of  Sales 
Ending  Inventory,  per  analysis 
Difference   (Cost  under-estimated) 

Overhead: 

Inventory  at  Commencement,  per  analysis 
Charges  during  the  Period 
Credit,  per  Estimated  Cost  of  Sales 
Ending   Inventory,   per  analysis 
Difference,  (Cost  under-estimated) 


$13,986.00 
6,220.70 

•  12.30 

$   2,520.00 
17,699.90 

$20,219.00 

$20,2IQ.OO 

$   798.00 
2,922.80 

$1,680.00 

2,032.80 

8.00 

$3,720.80 

$3,720.80 

$  96.00 
606.50 

$320.00 

376.00 

6.50 

$702.50 

$702.50 

{Lesson  Twenty) 

Now  that  the  Estimated  Costs  and  the  Actual  Costs  have  been  brought 
together,  the  following  differences  are  seen  to  exist: 

Under-estimated 


Materials 

Per 

Ledger 

Actual 

Over-estimated 

Inventory 

$1 

7,686.70 

$17,699.00 

$12.30 

Labor 

Inventory 

2,040.80 

2,032.80 

Overhead 

Inventory 

382.50 

376.00 

$8.00 
6.50 

$20,110.00        $20,107.80  $12.30  $14.50 

The  comparison  shows  a  net  difference  of  $2.20,  which  is  accounted  for  by 
the  cost  of  materials  having  been  slightly  over-estimated,  and  the  labor  and 
overhead  costs  having  been  slightly  under-estimated.  The  estimates  for  future 
periods  would  have  required  revision,  if  the  differences  had  been  considerable 
in  amount. 

The  illustration  shows  that  the  verification  is  accomplished  by  comparing 
each  element  of  the  estimated  cost  with  the  estimated  cost  of  the  same  element 
estimated  to  be  in  the  ending  physical  inventory.  It,  therefore,  follows  that  an 
estimating  system  is  dependent  upon  an  actual  physical  inventory  for  verifica- 
tion, and  that  the  greatest  possible  degree  of  care  is  required  in  forming  the 
estimates,  and  taking  the  inventory.    Inventory  tests  should  be  frequently  made. 

The  student  will  perceive  that  estimating  systems  are  particularly  applicable 
to  industries  carried  on  under  constant,  and  simple  conditions. 

The  illustration  covers  a  single  article,  the  method,  however,  may  be 
extended  to  several  articles,  if  provision  is  made  for  separately  proving  the 
estimated  costs  of  each. 

QUESTIONS  FORMING  THE  TWENTIETH  EXAMINATION. 

1.  In  what  two  principal  features  does  a  completely  detailed  cost  system 

differ  from  an  estimating  cost  system? 

2.  If  you  were  required  to  install  an  estimating  cost  system  for  the  purpose  of 

verifying  the  estimated  cost  of  each  element  entering  into  the  manufac- 
ture of  each  of  several  different  articles,  what  records — other  than  the 
books  of  account — would  you  require? 

3.  Referring  to  question  2,  explain  the  operation  of  the  system. 

4.  If  an  estimating  cost  system  is  to  verify  the  total  cost  only,  what  records 

are  required  in  addition  to  the  Books  of  Account? 

5.  What  special  accounts  would  be  required  on  the  Ledger,  for  the  purpose 

of  proving  the  estimates? 

6.  How  would  the  special  accounts  be  operated  upon  the  Ledger? 

7.  What  is  the  purpose  of  the  special  accounts? 

8.  Referring  to  questions  4  to  7,  if  the  estimating  cost  systems  covered  differ- 

ent classes  of  articles,  for  which  the  verification  is  made  in  one  total 
only,  to  what  extent  could  reliance  be  placed  upon  the  estimates,  if  the 
estimated  costs  were  found  to  be  approximately  (or  even  exactly)  the 
same  as  the  actual  costs? 

5 

(Lesson  Twenty) 


Q.     Referring-  to  question  5,  how  would  you  dispose  of  the  special  accounts 
after  the  verification  is  completed? 

10.     Consider  the  following  conditions,  relative  to  an  estimating-  cost  system 
for  a  single  article: 

The  Material  Cost  was  estimated  as  $9-74 

The  Productive  Labor  Cost  5.26 

The  Overhead  Cost  1. 00 

Total  Estimated  Cost  $16.00 

Owing  to  differences  in  classification  (material  and  labor  classed  as  direct 
in  the  estimates,  were  classed  as  indirect  in  the  accounts)  the  following 
were  found  to  be  the  actual  costs: 

Materials  $9-50 

Productive  Labor  5.16 

Overhead  1.34 

Total  Actual  Cost  $16.00 

Give  your  opinion  of  the  result,  and  state  what  course  you  would  advise, 
and  to  what  end. 


(Lesson  Twenty) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


TWENTY-FIRST  LESSON 


Copyrighted  1920 
J.  LEE  NICHOLSON  4NSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
Upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any^  sale, 
gift  or  loan,  to  any  person  or  persons. 


TWENTY-FIRST  LESSON 

SUBJECTS:  CLASSIFICATION  OF  FACTORY  LEDGER  ACCOUNTS: 
MANUFACTURING    CONTRACTS  BASED  UPON  COST: 

The  accounts  in  a  factory  ledger  are  largely  formed  from  original  entries 
made  upon  comparatively  small  report  forms,  which  are  usually  numerous 
and  varied.  The  Ledger  Accounts  to  be  indicated  upon  the  farms  are  generally 
conducted  under  governing  classifications,  of  which  each  account  is  a  sub- 
classification. 

The  number  of  accounts,  the  number  of  classifications  to  be  provided  for, 
the  limited  space  upon  the  original  record,  and  the  necessity  for  automatic 
Ledger  indexing,  are  considerations  which  demand  a  well  planned  system  of 
accounts  classification. 

The  student  knows  the  reasons  why  a  standard  cost  system  is  an  impossi- 
bility. For  precisely  the  same  reasons,  a  standard  system  of  accounts  classi- 
fication is  an  impossibilty.     Standard  methods,  however,  are  possible. 

The  objects  to  be  gained  by  a  system  of  accounts  classification  are  principal- 
ly the  following: 

(i)     To  obviate  the  necessity  for  writing  classifications  and  sub-classifica- 
tions, at  length  upon  the  factory  forms  and  records. 

(2)     To  provide  a  ready  and  effective  means  for  identifying  classifications, 
and  sub-classifications,  by  the  use  of  indicants. 

Capital  letters  of  the  alphabet  may  be  advantageously  used  as  indicants  for 
principal  classifications,  and  numerals  for  sub-classifications,  or  numerals  and 
small  letters  of  the  alphabet  may  be  used  in  cases  where  more  than  one  sub- 
classification  is  required. 

The  following  will  serve  to  exemplify  the  use  of  capital  letters  for  a  princi- 
pal classification,  and  numerals  for  sub-classifications. 

B— Banks: 

I — First  Nat'l,  2 — Guaranty  Trust,  3 — 2nd,   Nat'l. 

C — Items   Receivable: 

I — Notes    Receivable,   2 — Customers  A-G. 

3 — Customers  H-N,  4 — Customers  0-Z 

Thus  Bi,  would  indicate  the  First  National  Bank,  B2,  the  Guaranty  Trust, 
B3,  the  Second  National  Bank.  Ci  would  indicate  Notes  Receivable,  C2  Cus- 
tomers Ledger  A-G,  C3,  Customers  Ledger  H-N,  C4,  Customers  Ledger  0-Z. 

The  following  will  serve  to  exemplify  the  use  of  capital  letters  for  a  princi- 
pal classification,  numerals  for  a  principal  sub-classification,  and  small  letters 
for  a  further  sub-classification: — 

J — Accruing  Manufacturing  Expense: 

I— Plant 
a — Repairs,  b — Depreciation,  c — Taxes 

3 

{Lesson  Twenty-One) 


2 — Power 

a — space  changes,  b — Engineers  and  Assistants. 

c — Repairs. 

d — Generating  Steam: 

I — Labor,  2 — Fuel,  3 — ^Water,  4 — Sundries. 
e — Micellaneous  items, 
f — Distribution  of  overhead. 

Thus,  Jia,  would  indicate  repairs), Jib,  Depreciation,  Jic,  Taxes,  all  charge- 
able against  accruing  manufacturing  expense,  "a/c  Plant." 

J2a,  would  indicate  the  proportion  of  rent,  J2b,  the  wages  of  engineers  and 
assistants,  J2c,  Repairs,  all  chargeable  against  accruing  manufacturing  expense, 
"a/c  Power."  J2di,  would  indicate  labor,  J2d2,  fuel,  J2d3,  water,  J2d4,  sundry  ex- 
penses, all  chargeable  to  accruing  manufacturing  expense — a/c  "Generating 
Steam,"  which  would  ultimately  be  closed  into  the  account  "Power,"  of  which 
it  is  a  sub-classification. 

From  the  foregoing  exemplifications  it  will  be  seen  that  the  clerical  work 
of  indicating  the  captions  of  the  various  accounts  is  greatly  reduced.  In  the 
case  of  the  principal  classification  "J"  and  the  sub-classifications  "2",  and  "d", 
the  use  of  "J2di"  accomplishes  the  purpose  which  would — if  written  at  length, 
require  the  writing  of  four  captions.  Furthermore,  "J2di"  instantly  shows  the 
relation  of  the  sub-classifications  to  the  principal  classification,  thus,  "i"  is  a 
sub-classification  of  "d",  which  is  a  sub-classification  of  "2",  which  is  a  sub- 
classification  of  "J". 

The  letters  of  the  alphabet  are  usually  sufficient  to  cover  principal  classifi- 
cations, without  repetition.  If  this  is  not  the  case,  classifications  may  be  con- 
tinued under  capital  and  small  letters,  thus — Aa,  Bb,  Cc,  etc. 

A  chart  of  the  complete  classifications  should  be  prepared,  upon  stiff  card,  a 
space  being  provided  between  the  principal  classifications  for  any  additional 
sub-classifications  which  may  afterwards  be  required.  The  chart  should  show 
the  principal  indicants  in  alphabetical  order,  irrespective  of  the  alphabetical  or- 
der of  the  account  indicated,  and  an  attached  chart  should  show  the  accounts 
in  alphabetical  order  irrespective  of  the  alphabetical  order  of  the  indicants.  The 
first  chart  would  take  the  form  exemplified  herein  with  respect  to  "Banks", 
"Items  Receivable"  and  "Accruing  Manufacturing  Expense".  The  other  chart 
would  be  shown  thus: — 

Customer's  Ledger  A-G  . .' C2 

Customer's  Ledger  H-N    C3 

Customer's  Ledger  0-Z C4 

Depreciation — Plant    Jib 

Engineers  and  Assistants — Power   J2b 

First  National  Bank  Bi 

Fuel — Generating  Steam   J2d2 

Guaranty  Trust    B2 

Labor — Generating  Steam J2d2 

Notes  Receivable   Ci 

Repairs — a/c  Plant    Jia 

Repairs — a/c  Power    J2c 

Second  National  Bank B3 

Space  Charges — a/c  Power  J2a 

Sundries — Generating  Steam    J2d4 

Taxes — a/c  Plant Jic 

Water — Generating  Steam J2d3 

4 

(Lesson  Twenty-One) 


The  foregoing  arrangements  of  the  charts  provide  a  ready  means  for  deter- 
mining the  accounts  which  indicants  represent,  or  conversely,  indicants  which 
are  to  be  used  for  the  accounts. 

Several  variations  of  the  use  of  letters,  as  indicants,  are  possible,  particu- 
larly in  connection  with  distinct  factory  operations  reported  upon  special  forms. 
In  these  cases,  the  forms  are  more  or  less  descriptive  of  the  operating  details, 
therefore,  the  use  of  letters,  as  indicants,  may  be  recommenced  for  each  oper- 
ation. It  will  then  be  possible  to  combine  the  letters  in  a  manner  which  will 
convey  their  meaning  to  anyone  familiar  with  the  manufacturing  process. 
Thus,  if  "M"  denotes  machine,  "S"  denotes  supplies,  "O"  denotes  oils,  ,'W" 
denotes  waste,  "MSO"  would  denote  the  use  of  oil  as  a  machine  supply,  and 
"MSW"  would  denote  the  use  of  waste  as  a  machine  supply. 

This  method  has  the  advantage  of  immediate  suggestion,  since  each  letter 
is  the  commencing  letter  of  the  word  which  it  represents. 

As  previously  stated,  the  method  to  be  employed  will  depend  upon  its  ap- 
plicability to  existing  conditions. 

Some  method  is  required  by  every  cost  system,  and  it  is  a  duty  of  the  cost 
accountant  to  provide  it  when  devising  a  Cost  System,  or  when  existing  class- 
ifications are  found  to  be  inadequate. 

SUBJECT:    MANUFACTURING  CONTRACTS  BASED  UPON  COSTS 

(Collateral  reading,  chapter  No.  31.) 

The  efficiency  of  the  Cost  Department  of  a  factory  is  subjected  to  a  severe 
test  when  the  department  is  called  upon  to  furnish  a  statement  of  the  cost  in- 
curred in  connection  with  a  contract  based  on  a  given  percentage  of  profit  upon 
cost.  This  form  of  contract  is  steadily  growing  in  the  favor  of  Contractees 
and  Contractors. 

When  costs  are  uncertain  for  any  length  of  time  by  reason  of  advancing 
prices  for  materials  and  labor,  a  fixed  price  for  contract  work  is  likely  to  be 
inequitable  to  one  or  the  other  of  the  contracting  parties,  hence  the  employ- 
ment of  the  more  satisfactory  method  of  limiting  the  contractor's  profit 
to  a  given  percentage  of  the  cost. 

Manufacturing  costs  incurred  under  a  contract  are  subject  to  precisely  the 
same  cost  accounting  principles  as  costs  not  incurred  under  a  contract.  A 
contract  imposes  governing  conditions,  which  must  be  strictly  observed.  Even 
though  the  contract  defines,  or  regulates  the  costs,  an  extensive  contract  would 
usually  develop  contingencies  not  specifically  provided  for.  In  such  cases,  dis- 
puted cost  charges  would  be  largely  settled  by  the  intent  of  the  contract,  and 
by  the  ability  of  the  Contractor  to  substantiate  the  disputed  charge  as  being 
an  item  of  cost.  The  following  illustration  shows  where  certainty  ends,  and 
uncertainty  begins,  in  respect  of  a  Contractor's  ability  to  substantiate  a  charge 
for  cost,  as  being  a  proper  charge: — 

A  manufacturer  enters  into  a  contract  conditioned  upon  the  production  of  a 
given  product  at  manufacturing  cost,  plus  a  fixed  profit  thereon  of  10  per  cent. 

Upon  completion  of  the  contract,  the  cost  records  show: — 

Materials  used $50,000.00 

Productive  labor  employed 35,000.00 

Overhead  charges 3,500.00 

Total  Manufacturing  Cost,  per  cost  records  $88,500.00 

5 

(.Lesson  Twenty-One) 


The  contractor  bills  the  contract  as  follows : — 

Materials  used $50,ocx).oo 

Productive  Labor  employed 35,000.00 

Overhead  charges 5,000.00 

Total  cost $90,000.00 

Profit,  per  contract,  10  per  cent 9,000.00 

i  

$99,000.00 

The  contractee  is  satisfied  v^^ith  the  prime  cost  charges,  but  the  overhead 
charge  of  $5,000.00  appears  to  be  excessive,  he  therefore,  requests  an  itemized 
statement  of  the  overhead,  v^rhich  is  furnished,  showing  the  following: — 

Details  of  Overhead  Charges: — 

Proportion  of  Departmental  Overhead,  per  schedule $2,250.00 

Proportion  of  General  Factory  Overhead,  per  schedule 750.00 

Proportion  of  Administrative  Overhead,  per  schedule 500.00 

Proportion  of  Interest  on  borrowed  Capital,  per  schedule  ....     1,500.00 

Overhead,  per  bill  rendered $5,000.00 

The  Contractee  admits  the  overhead  charges  amounting  to  $3,500.00,  he, 
however,  takes  exception  to  the  charge  of  $1,500.00,  as  "proportion  of  Interest 
on  borrowed  Capital,"  contending  that  the  interest  is  not  a  manufacturing  cost. 
In  this  case,  the  contractor's  ability  to  certainly  substantiate  the  costs  ended, 
and  uncertainty  began,  with  the  interest  charge  of  $1,500.00.  His  position 
would  have  been  strengthened  if  his  cost  records  showed  that  he  invariably 
treated  the  interest  as  a  manufacturing  cost.  In  any  event,  conclusive  deter- 
mination of  the  matter  might  involve  judicial  decision.  The  amount  at  issue 
would  be  Interest  $1,500.00,  plus  10  per  cent  $150.00,  a  total  of  $1,650.00. 

We  illustrate  this  matter  for  the  purpose  of  showing  the  importance  of  hav- 
ing a  clear  statement  of  the  elements — as  far  as  they  may  be  foreseen — which 
shall  constitute  cost,  in  a  contract  based  upon  cost. 

Costs  which  cannot  be  foreseen,  and  for  that  reason  not  specifically  pro- 
vided for  in  a  contract,  are  always  governable  by  modifications  of  the  contract, 
which  should  be  obtained  by  the  contractor  as  the  necessity  arises. 

The  mere  fact  that  a  contract  is  based  upon  manufacturing  cost,  and  a  fixed 
percentage  of  profit  upon  the  cost,  implies  a  right  of  the  contractee  to  receive 
a  sufficiently  detailed  statement  of  the  costs,  even  though  it  is  not  so  stipu- 
lated in  the  contract.  Work  done  under  such  a  contract  differs,  in  this  respect, 
from  »vork  done  under  ordinary  commercial  conditions,  therefore,  the  account- 
ing methods  must  necessarily  differ.  In  accounting  for  the  costs  of  a  contract 
based  upon  cost,  it  is  necessary  to  carry  the  direct  application  of  overhead  to 
a  degree  of  greater  refinement  than  is  considered  essential  in  the  case  of  the 
regular  commercial  business  of  the  factory,  for  the  reason  that  details  of  the 
overhead  will  usually  be  required  by  the  contractee.  Uncertainties,  as  to  the 
equitable  charging  of  overhead  by  means  of  arbitrary  proratings,  should  be  re- 
duced to  the  lowest  possible  point,  thereby  removing  causes  for  disagreement. 

The  cost  department,  in  conjunction  with  officials  who  possess  the  requisite 
technical  knowledge,  should  be  the  factor  to  be  relied  upon  for  properly  pro- 
tecting the  interests  of  the  contractor,  when  a  contract  is  formulated. 

6 

(Lesson  Twenty-One) 


QUESTIONS    FORMING  THE 
TWENTY-FIRST  EXAMINATION 

(i)  The  following  details  relate  to  classifications  of  accounts  used  by  an 
Axle  Mannufacturing  Company. 

The  work  in  process  accounts  are  distinguished  by  Capital  letters,  and  the 
sub-classifications  by  numerals,  as  follows: 

K — Horse  drawn  axles: — 

Ki — Material,  K2 — Labor,  K3 — Expense,  K4 — Machine  time. 
L — Pleasure  Auto  Axle: — 

Li — Material,  L2 — Labor,  L3 — Expense,  L4 — Machine  time. 
M — Commercial  Auto  Axle: — 

Mi — Material,  M2 — Labor,  M3 — Expense,  M4 — Machine  time. 

The  investments  are  distinguished  by  Capital  letters,  and  sub-classifications 
by  numerals  and  small  letters,  as  follows: 

Q — Investments : 

I — Stocks  and  Bonds: 

Qia — bonds,  Qib — stock. 
2— Plant : 

Q2a — Real  Estate,  Q2b — Axle  Building. 

Q2C — Horse  drawn  axle  building. 

Q2d — Pleasure  auto  axle  building. 

Q2e — Commercial  auto  axle  building. 

3 — Machinery  and  Equipment: 
Q3a — Axle  Department. 
Q3b — Horse  drawn  axle  department. 
Q3C — Pleasure  auto  axle  department. 
Q3d — Commercial  auto  axle  department. 

From  the  foregoing  details  prepare  a  chart  of  the  classifications,  in  the  form 
which  you  consider  would  meet  all  requirements. 

(2)  Assume  a  contract  to  be  entered  into,  which  is  based  upon  manufac- 
turing costs,  plus  a  profit  of  10  percent  upon  the  costs,  no  further  qualifying  con 
ditions  being  made. 

The  process  of  manufacture  required  a  special  tool,  which  was  purchased,  at 
a  cost  of  $150.00,  and  its  value  was  completely  used  upon  the  contract,  no  resid- 
ual value  remaining. 

If  the  material  costs  were $25,000.00     • 

Productive  Labor  Costs 18,500.00 

Overhead    Costs 500.00 

Cost  of  special  tool 150.00 

Show  the  cost  of  the  contract  in  detail,  and  the  amount  of  the  manufacturer's 
profit  thereupon.  j 

(3)  Referring  to  question  No.  2,  give  similiar  information  if  the  special 
tool  had  a  residual  value  of  $50.00  at  the  completion  of  the  contract. 

(4)  Referring  again  to  question  No.  2,  show  the  cost  of  the  contract  in  de- 
tail, and  the  amount  of  the  manufacturer's  profit  thereupon,  if  the  special  tool 

7 

{Lesson  Twenty-One) 


were  manufactured  in  the  factory,  at  a  cost  of  $140.00,  and  no  residual  value  re- 
mained at  the  completion  of  the  contract. 

(5)  Referring  again  to  question  No. 2,  suppose  the  special  tool  (purchased 
for  $150.00)  was  capable  of  further  service  at  the  completion  of  the  contract, 
but  not  in  connection  with  the  business  of  the  contractor,  he,  therefore,  does 
not  wish  to  consider  any  proposition  for  acquiring  the  tool.  Show  the  cost  of 
the  contract  in  detail  and  the  amount  of  the  Manufacturer's  profit  thereupon, 
and  state  how  the  tool  should  be  disposed  of. 

(6)  Assuming  the  following: — 

A  Foundry  operates  a  single  cupola  which  under  normal  conditions,  suffices 
for  melting  iron  and  composite  metals,  by  using  it  alternately.  A  contract  is 
to  be  entered  into  which  requires  the  continuous  production  of  Iron  Castings 
for  a  period  of  3  months.  In  order  to  meet  this  condition  and  keep  pace  with 
regular  business  in  Iron  Castings,  and  provide  for  the  composite  castings  re- 
quired by  business  not  covered  by  the  contract,  a  temporary  cupola  for  melting 
composite  metals  is  to  be  constructed,  by  the  factory  employees,  at  a  cost  of 
$500.00,  and  it  is  to  be  demolished  upon  completion  of  the  contract,  no  residual 
value  remaining.  The  contract,  is  to  provide  for  cost,  plus  a  profit  of  10  per- 
cent upon  cost.  If  you,  as  head  of  the  cost  department,  are  required  to  formu- 
late the  contract,  how  would  you  deal  with  the  expenditure  of  the  $500.00  in 
question. 

(7)  If  a  contract  is  entered  into  on  the  basis  of  cost,  plus  a  specified  per- 
centage of  profit  on  cost,  and  the  contractor  purchases  materials  for  the  con- 
tract, costing  $5,000.00,  which  were  worth  $5,500.00  in  the  open  market  at  the 
time  of  purchase,  what  amount  would  the  contractor  be  justified  in  charging 
against  the  contract  for  materials  purchased. 

Subsequent  lessons  will  be  devoted  to  Cost  Accounting  problems.  The  prob- 
lems are  designed  to  test  the  student's  knowledge  of  the  subjects,  covered  by 
the  course;  they  therefore  commence  with  comparatively  simple  conditions  and 
progressively  take  up  more  complex  conditions. 


8 

(Lesson  Twenty-One) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


TWENTY-SECOND  LESSON 


Copyrighted   1920 
J.  LEE  NICHOLSON   INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any^  sale, 
gift  or  loan,  to  any  person  or  persons. 


TWENTY-SECOND  LESSON 

SUBJECT:    PROBLEMS  FORMING  THE  TWENTY-SECOND  LESSON. 

It  is  the  purpose  of  the  remainder  of  the  course,  to  extend  the  student's 
knowledge  of  cost  accounting  by  a  series  of  examinations  which,  from  compar- 
atively simple  conditions,  develop  the  practical  requirements  of  more  complex 
conditions. 

Problem  No.  i : 

The  purpose  of  the  problem  is  to  test  the  student's  ability  to  present  finan- 
cial statements  in  cases  where  a  definitely  ascertained  merchandise  inventory  is 
not  available,  but  where  the  costs  and  product  are  sufficiently  standard  to 
enable  an  approximate  estimate  of  the  merchandise  inventory  to  be  made.  The 
problem  also  involves  ability  to  present  the  required  statements  in  an  orderly 
manner. 

The  following  is  a  list  of  balances  shown  by  the  General  Ledger,  as  at 
January  31,  1920: 

Cash — Central  Trust  Co $13,134.90 

Cash — Petty  Cash  Fund 300.10 

Accounts  Receivable   1 16,720.80 

Machinery,  Equipment  &  Fixtures 46,279.20 

Real  Estate  (Factory  use)  30,000.00 

Factory  Buildings 80,000.00 

Accounts  Payable 40,230.60 

Notes  Payable 5,769.40 

Capital  Stock 300,000.00 

Reserve  for  Depreciation — Machinery  and  Equipment. .       6,500.00 

Surplus    $29,500.00 

Merchandise  Sales   62,780.00 

Merchandise  Inventory,  January   ist,    1920 100,216.40 

Materials  purchased   42,783.60 

Pay-Roll — Productive  Labor 5,300.90 

Pay-RoU — Non-Productive  Labor 1,299.10 

Freight  and  Cartage  Inward 1 17-50 

Freight  and  Cartage  Outward 232.50 

Light,  Heat  and  Power — Factory 225.00 

Miscellaneous  Factory  Expenses   3I5-00 

Office  Salaries 3,685.00 

Taxes — Real  Estate,  Factory 350.00 

Repairs — Factory   320.00 

Selling  Expenses 3,500.00 

The  student  will  observe  that  the  foregoing  balances  are  not  classified  as  to 
debit  and  credit  balances.  It  is  assumed  that  the  descriptions  are  sufficient 
for  the  purpose  of  distinguishing  the  debit  balances  from  the  credit  balances. 

Before  proceeding  with  the  solution  of  the  problem,  it  will  be  necessary  to 
prepare  a  Trial  Balance  from  the  foregoing  list  of  balances.  It  will  assist  the 
student  in  constructing  the  required  financial  statements,  if  he  indicates  the 

(Lesson  Twenty-Two) 


financial  statement  in  which  each  balance  must  appear  by  entering  No.  i,  No. 
2,  or  No.  3,  on  the  left  hand  margin  of  the  Trial  Balance. 

The  financial  statements  required  are — in  their  natural  order — as  follows: 

(i)     Manufacturing  statement — see  page  298  of  collateral  reading. 

The  accounting  system,  which  provided  the  list  of  ledger  balances  given  with 
the  problem,  does  not  show  the  merchandise  inventory  on  hand  at  any  time  other 
than  when  a  physical  inventory  is  taken. 

The  business,  however,  is  assumed  to  be  conducted  under  the  following 
conditions: 

(a)  The  product  is  standard. 

(b)  The  costs  (material,  labor,  and  overhead)  maintain  a  constant  relation 

to  the  selling  price,  that  is,  any  fluctuations  in  the  costs  are  accounted 
for  by  similar  fluctuations  in  the  selling  price,  so  that  the  percentage 
of  gross  profits  is  uniformly  maintained. 

(c)  The  gross  profits  of  previous  years  have  confirmed  the  relation  to  sell- 

ing prices  referred  to  under  (b),  and  estimated  inventories  have 
closely  conformed  to  physical  inventories. 

Under  the  foregoing  conditions,  the  merchandise  inventory — as  a 
whole — may  be  approximately  estimated.  Where  this  is  possible  and 
one  standard  product  is  manufactured,  the  manufacturing  results 
may  be  obtained  with  a  sufficient  degree  of  accuracy  to  dispense  with 
the  clerical  details  which  would  be  required  in  accounting  for  a  per- 
petual inventory. 

The  manufacturing  statement  required  by  the  problem,  should  com- 
mence with  the  merchandise  inventory  at  January  i,  1920,  and  end 
with  the  estimated  inventory  at  January  31,  1920,  thus: — 

Commencing  inventory,  plus  direct  and  indirect  charges  (detailed)  ar- 
riving at  total  factory  charges,  from  which  the  estimated  cost  of  sales 
is  to  be  deducted,  leaving  the  estimated  ending  inventory. 

(2)  The  Profit  and  Loss  statement,  made  possible  by  the  estimated  cost  of 

sales  shown  upon  the  manufacturing  statement,  will  show  the  estimated 
net  profit  to  be  transferred  to  the  Balance  Sheet.  In  previous  lessons 
we  referred  to  the  importance  of  supplementing  the  details,  shown  by 
the  figures,  by  a  tabulation  showing  percentages  of  the  costs  to  the 
sales.  In  the  present  instance,  such  percentages  as  you  deem  to  be  im- 
portant should  be  shown. 

(3)  The  Balance  Sheet — made  possible  by  the  manufacturing  statement,  and 

the  Profit  and  Loss  statement,  should  be  prepared  in  an  orderly  man- 
ner, so  that  the  financial  condition  of  the  business,  may  be  clearly  as- 
certained from  a  brief  inspection.  In  other  words,  it  should  not  be 
necessary  to  analyze  any  part  of  it. 

The  figures  to  be  placed  upon  the  left  margin  of  the  Trial  balance  as 
previously  stated — will  indicate  the  statement  upon  which  each  is  to 
appear,  therefore.  No.  i  will  indicate  the  Manufacturing  Statement,  No. 
2  will  indicate  the  Profit  and  Loss  Statement,  No.  3  will  indicate  the 
Balance  Sheet.  By  this  means,  it  will  be  possible  to  readily  construct 
each  statement. 

4 

(Lesson  Twenty-Two) 


Conditions  of  the  problem: 

Depreciation  of  Machinery  and  Equipment  is  to  be  provided  for  at  the  rate 
of  lo  per  cent  per  annum  upon  the  asset  amount,  95  per  cent  of  the  deprecia- 
tion being  chargeable  to  the  factory,  and  5  per  cent  chargeable  to  administra- 
tive expenses. 

The  operations  of  the  factory  during  past  periods  show  the  manufacturing 
costs  to  have  been  75  per  cent  of  the  sales. 

From  the  foregoing  details  prepare: — 

A  Manufacturing  Statement  for  January  1920. 

A  Profit  and  Loss  Statement  for  January,  1920. 

A  Balance  Sheet,  at  January  31,  1920. 
Problem  No.  2. 

This  problem  involves  ascertaining  an  inventory  from  details  kept  in  the 
books  of  account,  w^ithout  the  necessity  for  maintaining  separate  stock  records. 
The  method  to  be  followed,  and  its  applicability  are  covered  by  collateral  read- 
ing, page  455,  with  reference  to  unit  costs. 

The  following  details  relate  to  a  retail  coal  business.  The  account  keeping 
system  is  double  entry,  the  ledger  accounts  of  coal  purchased,  and  coal  sold  be- 
ing arranged  to  show  the  quantities  in  addition  to  the  values. 

Purchases  of  coal  are  made  on  the  basis  of  2240  lbs.  per  (long)  ton. 

Sales  are  made  on  the  basis  of  2000  lbs.  per  (short)  ton. 

The  details  entering  into  the  problem  are: — 

(a)  At    June    30,    1920,    2,240,000  lbs.  of  coal  were  on  hand,  valued  at 

$6,720.00. 

(b)  The  purchases  during  July  were  3360  tons,  of  2240  lbs.  each,  invoiced 

at  $22,578.60. 

(c)  The  sales  during  July  were  3780  tons,  of  2000  lbs.  each,  amounting  to 

$30,240.00. 

(d)  Experience  has  shown  that  a  shrinkage  of  !4  of  i  per  cent  occurs  in 

handling  coal. 

The  shrinkage  will  be  represented  by  slightly  different  proportions,  depend- 
ing upon  the  hardness  or  softness  of  the  coal.  In  a  large  business,  several  vari- 
eties of  coal  may  be  handled  each  variety  being  separately  purchased,  stored, 
and  delivered.  Each  such  variety  would  require  separate  accounting  classifi- 
cations, and  if  the  business  in  each  was  sufficiently  extensive  to  warrant  a 
separation  of  the  operating  expenses,  they  should  be  appropriately  classified, 
with  the  object  of  showing  the  financial  results  from  each  classification.  In 
this  case,  the  proportion  of  loss  by  shrinkage  would  be  determined  for  each 
classification,  and  the  ending  inventory,  for  any  period,  adjusted. 

The  conditions  of  the  problem,  assume  one  grade  of  coal  only  to  be  dealt  in, 
therefore,  the  shrinkage  of  !4  of  i  per  cent  is  to  be  taken  into  account  in  arriv- 
ing at  the  inventory  at  July  31st. 

The  following  were  the  expenditures  for  July: 

(e)  Pay  Roll  and  Salaries: 

Labor  in  yard  $300.00 

Labor,  delivering  to  yard  510.00 

Labor,  delivering  sales  1,050.00 

Supervision  (General)  225.00 

Office  Salaries  375-00 

(Lesson  Twenty-Two') 


For  the  purpose  of  illustrating  the  methods  presented  by  the  problem,  the 
labor  in  yard,  and  delivering  to  yard,  is  considered  as  chargeable  to  the  opera- 
tions for  the  month  of  July.  If  large  stocks  are  maintained  in  the  yard,  it 
would  probably  be  advisable  to  separate  the  labor  charges  somev^^hat  as  fol- 
low^s: 

Yard  labor: 

( 1 )  Labor,  piling  incoming  stock. 

(2)  Labor,  loading  outgoing  deliveries. 

(3)  Sundry  yard  labor. 
Labor  delivering  to  yard : 

(4)  Should  be  confined  exclusively  to  labor  charges  for  delivering  pur- 

chases of  coal  to  the  yard. 

Under  the  above  stated  classifications,  the  charges  for  (i)  and  (4)  would  be 
added  to  the  purchase  cost  of  the  coal,  so  that  its  yard  or  inventory  value 
would  consist  of  the  purchase  cost,  plus  the  expense  of  installing  it.  This  value 
would  be  correct  for  both  Inventory  and  fire  loss  purposes. 

(f)  The  charges  for  transportation  during  the  month  were  as  follows: — 

(i)  Garage  labor  $200.00 

(2)  Truck  Repair  320.00 

(3)  Depreciation    of   Equipment  150.00 

(4)  Truck  supplies  used  480.00 

These  charges  are  based  upon  the  assumption  that  the  equipment  was  owned 
by  the  business,  therefore,  any  charges  incurred  in  respect  to  incoming  coal 
should  be  dealt  with  in  the  same  manner  as  the  charges  referred  to  in  connec- 
tion with  yard  labor  and  labor  delivering  to  the  yard. 

Briefly  stated,  all  expenditures  made  in  acquiring  the  coal  piled  in  the  yard, 
should  represent  its  cost.  When  purchases  are  graded  and  sifted  at  the  yard, 
preferential  values  should  be  assigned  to  the  resulting  grades,  the  total  value 
thus  assigned  being  equal  to  the  total  of  the  purchase  price,  to  which  should  be 
added  the  cost  of  grading  upon  a  tonnage  or  other  equitable  basis. 

(g)  The  remaining  expenditures  during  July  were: — 

(i)     Rent  $250.00 

(2)  Insurance   (proportion)  30.00 

(3)  Sundry  Ofiice  Expenses  98.00 

(h)  In  addition  to  the  aforementioned  information,  the  following  balances 
also  appear  upon  the  Ledger  at  July  31,  1920: 

Cash  $4,800.00 

Accounts  Receivable  17,437.40 

Accounts  Payable  6,250.00 

Taxes  prepaid  116.00 

Insurance  unexpired  150.00 

Yard  and  Equipment  10,240.00 

Office  Furniture  &  Fixtures  240.00 

Reserve  for  Depreciation  720.00 

Capital  Stock  25,000.00 

Undivided  Profits  June  30,  1920.  4,660.00 

Supplies,  Inven.  July  31,  1920  600.00 

From  the  foregoing  details,  prepare  the  following: 

6 

(Lesson  Twenty-Two^  ' 


Trading  and  Profit  and  Loss  Statement  for  July,  1920,  showing  also  the 
average  per  ton  of  each  item  of  income  and  expenditure,  and  of  the  net  profit. 

Balance  Sheet  at  July  31st,  1920, 

Details  of  the  Coal  Account,  as  it  should  appear  upon  the  Ledger  after  clos- 
ing, showing  quantities  and  costs,  in  respect  of: — 

Inventory  at  June  30,  1920. 
Purchases  for  July  1920. 
Cost  of  July  1920  Sales. 
Shrinkage  for  July  1920. 
Inventory  at  July  31,  1920. 


(Lesson  Twenty-Two) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


TWENTY- THIRD  LESSON 


Copyrighted  1921 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


TWENTY- THIRD  LESSON 

PROBLEM  I. 
VERIFICATION  OF  ESTIMATED  COSTS. 

(Collateral  Reading,  Part  6,  Chapter  28.) 


The  verification  provided  by  the  problem,  is  confined  to  the  total  material 
cost,  total  labor  cost,  and  total  overhead  cost,  each  being  separately  proved. 
The  proof  does  not  extend  to  product  classifications,  the  three  above  stated 
elements  of  cost  being  taken  for  the  aggregate  of  product. 

Assuming  a  manufacturing  business  is  engaged  in  turning  out  7  different 
lines  of  product,  the  factory  costs  being  estimated  to  be  as  follows: 


Total 

Material 

Labor 

Overhead 

Product 

Cost 

Cost 

Cost 

Cost 

I 

$4.20 

$2.80 

$  .80 

$  .60 

2 

S.io 

3-50 

.95 

.65 

3 

5.50 

4.00 

.82 

.68 

4 

6.15 

4-50 

•95 

.70 

5 

6.80 

475 

.85 

1.20 

6 

8.40 

6.00 

1. 00 

1.40 

7 

9.70 

6.10 

1.60 

2.00 

$45.85 

$31.65 

$6.97 

$7-23 

The  foregoing  schedule  of  estimated  costs  covers  each  product  of  the  fac- 
tory, hence  all  factory  expenditures,  during  the  period  for  which  the  estimated 
costs  are  to  be  compared  (verified)  with  the  actual  costs,  must  be  shown  upon 
the  Ledger  under  the  appropriate  caption,  as  material,  labor,  or  overhead.  Each 
class  of  factory  product  in  the  beginning  and  ending  Inventories  of  the  period, 
and  in  the  Sales  for  the  period,  must  be  divided  into  the  three  elements  of  cost 
which  are  to  be  the  subjects  of  verification. 

The  Inventory  at  January  i,  1920,  after  its  division  into  the  three  elements 
of  estimated  cost,  showed  the  following: 

Quantity  Estimated  cost  of  unit  of  product : 

Product  on  hand  Material  Labor  Overhead 

1  600  $2.80  $  .80  $  .60 

2  500                       3.50  .95  .65 

3  600                      4.00  .82  .68 

4  300                      4.50  .95  .70 

5  400                      4.75  .85  1.20 

6  450                     6.00  1. 00  1.40 

The  pricing  of  the  commencing  Inventory — shown  above — is  in  accordance 
with  the  costs  shown  by  the  schedule  of  estimated  costs  preceding.  It  will  be 
observed  that  there  was  no  stock  of  product  No.  7. 

3 

Lesson  Twenty-three 


The  expenditures  for  the  period  under  verification  were: 


Materials  purchased 
Productive  labor 
Overhead 

:     .  -i   ^ 

$47,000.00 
10,964.00 
10,025.00 

The  sales  during  January 

1920,  were: 

Product 
I 

2 

Quantity  Sold 
3200 
2600 

Selling  Price 
$5.00 
6.00 

3 
4 

5 
6 

2000 
1700 
1200 
1000 

6.50 

7-25 
8.00 
9.80 

7 

700 

11.20 

The  Inventory  at  January  31,  1920,  to  be  divided  into  the  three  elements 
of  estimated  cost  showed  the  following: 

Product  Quantity  on  hand 

1  500 

2  600 

3  400 

6  400 

7  200 

The  solution  of  the  problem  may  readily  be  accomplished  by  an  observance 
of  the  instructions  given  in  Chapter  28  of  the  collateral  reading. 

The  following  Ledger  Accounts  are  required: 

Material  Account 
Productive  Labor  Account 
Overhead  Expense  Account 
Sales  Account 
Balancing  Account 

The  "Balancing  Account"  serves  the  purpose  of  providing  for  double  en- 
tries, and  it  accomplishes  the  feature  of  control. 

The  Inventories  used  are  supposed  to  be  (must  always  be)  actual  physical 
Inventories.  If  the  totals  of  material,  labor,  and  overhead  shown  by  the  ending 
Inventory  do  not  respectively  agree  with  the  balances  of  those  accounts  as 
shown  by  the  Ledger,  adjusting  entries  are  to  be  made  for  bringing  the  Ledger 
Accounts  (Book  Inventory)  into  agreement  with  the  actual  Inventory. 

Prepare  the  necessary  forms,  and  record  thereon  the  foregoing  details. 

Post  the  details  shown  by  the  forms — as  original  entries — to  the  appropri- 
ate Ledger  Accounts, 

Prepare  a  trial  balance  of  the  accounts  after  all  postings  and  adjustments 
have  been  made. 

Submit  a  copy  of  each  of  the  foregoing  accounting  requisites. 

4 

Lesson  Twenty-three 


VERIFICATION  OF  ESTIMATED  COSTS 
FURTHER  DEVELOPED. 

The  preceding  problem  was  confined  to  verifying  each  element  of  cost  which 
entered  into  7  products  taken  collectively.  The  solution  of  the  problem  shows 
a  close  approximation  of  estimated  and  actual  costs,  nevertheless,  if  the  veri- 
fication had  been  extended  to  each  class  of  product  according  to  classifications 
of  materials  used  in  departments  and  departmental  labor  and  overhead,  differ- 
ences might  have  been  shown  to  exist  between  the  estimated  and  actual  costs 
of  certain  products,  which  were  not  shown  by  the  former  verification. 

We  will  now  develop  the  method  exemplified  by  the  previous  problem,  by 
extending  it  to  cover  the  following: 

Verification  of  Estimated  Costs  of  each  class  of 
several  products,  based  upon  the  classification  of 
material  used  in  different  departments,  and  upon  the 
labor  and  overhead  costs  of  such  departments. 

The  result  of  this  development  will  be  a  more  detailed  verification  of  the 
estimated  costs  by  means  of  more  extended  classifications. 

In  order  that  the  more  extended  verification  may  be  clearly  connected  with 
the  books  of  account,  we  give  the  following  as  a  trial  balance  at  January  i, 
1920: 

Trial  Balance  at  January  i,  1920. 


Dr. 

Cr. 

J I 

Cash 

$20,000.00 

J I 

Accounts  Receivable 

15,000.00 

J I 

Merchandise  Inventory 

17,215.00 

J I 

Machinery  and  Equipment 

30,000.00 

J I 

Accounts  Payable 

$10,435-00 

J I 

Notes  Payable 

4,500.00 

J I 

Undivided  Profits 

17,280.00 

J I 

Capital  Stock 

50,000.00 

$82,215.00  $82,215.00 

The  departmental  classifications  for  material  and  labor  are  represented  by 
departments  A  and  B,  as  shown  by  the  following: 

Schedule  of  Estimated  Costs. 


Material 

Lab 

or 

r'rodu 

ct         Dept.  A 

Dept.  B 

Dept.  A 

Dept.  B 

Overhead 

Total 

I 

$1.68 

$1.12 

$  .48 

$ 

•32 

$  .60 

$4.20 

2 

2.10 

1.40 

.57 

•38 

.65 

5.10 

3 

2.40 

1.60 

•49 

•33 

.68 

5-50 

4 

2.70 

1.80 

•57 

.38 

.70 

6.15 

5 

2.85 

1.90 

.51 

.34 

1.20 

6.80 

6 

3.60 

2.40 

.60 

.40 

1.40 

8.40 

7 

3-66 

2.44 

.96 

.64 

2.00 

9.70 

$18.99 

$12.66 

$4.18 

$2.79 

$7-23 

$45-85 

Lesson 

Twenty-three 

S 

The  foregoing-  schedule  does  not  differ  from  the  schedule  of  estimated  costs 
used  in  the  previous  problem,  except  in  the  departmental  divisions  applied  to 
the  material  and  labor  costs. 

The  merchandise  Inventory  at  January  i,  1920  is  classified  as  follows: 

Classification  of  Merchandise  Inventory  at  January  i,  1920. 
Material  Labor 


Product 

Dept.  A 

Dept.  B 

Dept.  A 

Dept.  B 

Overhead 

Total 

I 

$1,008.00 

$672.00 

$288.00 

$192.00 

$360.00 

$2,520.00 

2 

1,050.00 

700.00 

285.00 

190.00 

325.00 

2,550.00 

3 

1,440.00 

960.00 

294.00 

198.00 

408.00 

3,300.00 

4 

810.00 

540.00 

171.00 

114.00 

210,00 

1,845.00 

5 

1,140.00 

760.00 

204.00 

136.00 

480.00 

2,720.00 

6 

1,620.00 

1,080.00 

270.00 

180.00 

630.00 

3,780.00 

Raw  Materials 

500.00 

$7,068.00      $4,712.00     $1,512.00      $1,010.00      $2,413.00  $17,215.00 

The  Inventory  shown  for  each  class  of  product,  represents  finished  stock 
and  work  in  process  of  manufacture.  The  raw  material  shown  by  the  Inven- 
tory will  be  dealt  with  hereafter. 

The  sales  are  to  be  grouped  under  the  following  classifications: 

Products  I  and  2  Sales  X 

Products  3-4-5  Sales  Y 

Products  6  and  7  Sales  Z 

Accounts  for  the  foregoing  classifications  will  be  required  upon  the  ledger. 

The  Expenditures,  during  January,  were : 
Materials  purchased  $47,000.00 

Productive  Labor: 

Operating  Dept.  A. 
Operating  Dept.  B. 

Overhead-details  below 
Selling-details  below 
Administrative-details  below 

Particulars  of  Overhead  Expense: 

Indirect  labor 
Supervision 
Factory  Supplies 
Light,  Heat  and  Power 
Factory  Rent 
Insurance  (Factory) 

Depreciation: 

7/4  %  per  annum,  on  Machinery  and  Equipment 

Repairs 

Maintenance 

Total  Overhead 


$6,578.40 
$4,385.60 

10,964.00 

10,025.00 

3,000.00 

2,000.00 

$7,595-00 
800.00 

180.00 

520.00 

450.00 

75.00 

$187.50 
167.50 

50.00 

$10,025.00 

Lesson  Twenty-three 

Particulars  of  Selling  Expenses : 

Salesmen's  Salaries  $500.00 

Commissions  150.00 

Traveling-  Expenses  650.00 

Advertising  1,600.00 

Office  Expenses  100.00 


$3,000.00 
I  

Particulars  of  Administrative  Expenses : 

Salaries  $1,945.00 

Light  and  Heat  20.00 

Insurance  10.00 

Office  Expenses  25.00 


$2,000.00 


The  follow^ing  expenditures  are  to  be  entered  upon  a  Purchase  Record 
(Form  50  Collateral  Reading,  page  246)  and  the  necessary  postings  made  there- 
from to  the  ledger.    One  ledger,  only,  is  assumed  to  be  in  use: 

Raw^  materials  purchased  .1 

Factory  Supplies 

Light,  Heat  &  Power  (Factory) 

Factory  Rent 

Insurance  (Factory) 

Repairs  &  Maintenance 

Advertising 

The  charge  for  depreciation  should  be  passed  through  the  Journal.  The 
remaining  items  of  expenditure  are  to  be  posted  directly  from  the  Cash  account, 
as  cash  transactions. 

The  cash  collections  during  the  month  were  $65,000.00,  and  payments 
amounting  to  $45,000.00  were  made  on  the  accounts  payable. 

The  necessary  Cash  account  should  be  opened  upon  the  ledger,  commenc- 
ing with  the  cash  on  hand  at  January  ist,  shown  by  the  trial  balance  at  that 
date. 

A  summary  of  the  bills  of  material  for  the  month,  showed  the  following 
particulars:  (See  form  17,  collateral  reading  page  85.  This  form  must  be 
modified  somewhat,  to  meet  the  requirements  of  the  problem.) 

Units  of  products  for  which 
materials  were  used : 

Product                                        Dept.  A  Dept.  B 

1  3200  3200 

2  1500  1500 

3  1000  1000 

4  1400  1400 

5  800  800 

6  950  950 

7  900  900 

This  summary  furnishes,  in  conjunction  with  the  schedule  of  estimated  costs, 
the  details  necessary  for  charging  the  respective  operating  classifications  and 
crediting  the  raw  material  account. 

7 

Lesson  Twenty-three 


The  sales  made  during  the  month  were  as  follows: 

Product  Units  sold  Rate 

1  3200  $  5.00 

2  2600  6.00 

3  20CX5  6.50 

4  1700  7.25 

5  1200  8.00 

6  1000  9.80 

7  700  11.20 

A  physical  Inventory  was  taken  at  the  end  of  the  month  (January  31st)  for 
the  purpose  of  testing  the  estimated  costs,  and  it  showed  the  following: 

Material  Labor 

Product  Dept.  A  Dept.  B  Dept.  A  Dept.  B  Overhead 

1  $   700.00  $400.00  $150.00  $125.00  $250.00 

2  900.00  600.00  250.00  180.00  300.00 

3  800.00  400.00  150.00  100.00  200.00 

6  1,200.00  800.00  200.00  120.00  400.00 

7  600.00  400.00  160.00  100.00  300.00 

$4,200.00       $2,600.00  $910.00  $625.00  $1,450.00 

Raw  materials  on  hand  amounted  to  $7,800.00. 

From  the  details  hereinbefore  given,  prepare  the  records  and  accounts  neces- 
sary to  exhibit  the  transactions,  close  the  accounts  for  the  month  and  prepare 
the  requisite  financial  statements. 

The  requisite  records,  accounts  and  statements  are  as  follows: 

Analysis  of  Inventory  at  January  ist,  showing  the  postings  there- 
from to  the  ledger.    (See  Form  loi,  page  467  of  collateral  reading.) 

Purchase  Record,  showing  postings  to  the  ledger.  (See  Form  50, 
page  246  of  collateral  reading.) 

Summary  of  Bills  of  Material  showing  postings  to  the  ledger.  (See 
Form  17 — page  85  of  collateral  reading.) 

Pay  Roll  Analysis  Form  56 — page  263  of  collateral  reading. 

Analysis  of  Sales  and  Cost  of  Sales,  showing  postings  to  the  ledger. 
(Refer  to  chapter  18,  page  276  of  collateral  reading.) 

In  addition,  the  student  is  required  to  show  the  journal  entries  and  ledger 
accounts  in  detail,  a  trial  balance  at  January  31,  1920,  a  Profit  and  Loss  state- 
ment for  the  month,  (See  Form  yy,  page  344  of  collateral  reading)  and  a  Bal- 
ance sheet. 

It  is,  of  course,  understood  that  the  forms  referred  to  in  the  collateral  read- 
ing are  to  be  modified  when  necessary — to  meet  the  requirements  of  the  prob- 
lem. 

The  accounting  procedure  is  explained  by  the  following: 

Journal  Entry  "A".  The  entry  places  the  commencing  trial  balance 
upon  the  exemplification  of  the  ledger,  which  the  student  requires. 

Classification  of  Merchandise  Inventory  at  January  ist.  The  classi- 
fication resolves  the  Inventory — $12,280.00 — into  the  components  of  the 
estimated  costs. 

8 

Lesson  Twcnty-ihree 


Journal  Entry  "B".  This  entry  accounts  for  the  depreciation  provid- 
ed by  the  problem.  Upon  the  Balance  sheet,  the  amount  of  depreciation 
reserve  may  be  shown  as  a  liability,  or  it  may  be  deducted  from  the  prop- 
erty asset.    If  the  latter  course  is  adopted,  the  deduction  must  be  set  out. 

Purchase  Record.  Ordinarily,  the  form  would  be  required  to  show 
the  number  of  each  Invoice,  the  name  of  the  creditor,  and  a  description 
of  each  purchase.  The  simplified  conditions  of  the  problem  provide  for 
the  amount  and  distribution  of  each  Invoice  only,  therefore,  the  various 
totals  of  the  working  accounts,  the  individual  amounts  in  the  "Miscel- 
laneous Column",  and  the  amount  which  affects  the  controlling  account, 
"Accounts  Payable",  are  the  only  postings  to  be  made  from  the  form. 

Summary  of  Bills  of  Material.  This  record  presents  the  details,  given 
in  the  problem,  in  classification  order  and  shows  the  material  costs  in 
accordance  with  the  schedule  of  estimated  costs.  The  totals  are  to  be 
posted  from  the  form  to  the  credit  of  raw  materials,  and  charged  to  the 
respective  operating  departments. 

Analysis  of  Pay  Roll.  This  record  places  the  pay  roll  under  the 
classifications  required  by  the  problem.  The  totals  are  to  be  posted  from 
the  form  to  the  various  accounts  affected. 

Analysis  of  Sales  and  their  Costs.  This  record  is  to  be  prepared  by 
the  student,  and  the  form  is  to  show  postings  to  the  ledger. 

The  solution  of  the  problem  is  considerably  facilitated  by  the  working  de- 
tails which  we  have  hereinbefore  supplied,  the  student  should  therefore  be 
readily  able  to  carry  the  solution  to  completion,  after  studying  the  partial 
solutions  given. 

The  student  is  requested  to  accompany  his  solution  of  the  problem  with 
a  complete  set  of  forms  showing  the  ledger  postings  made  therefrom,  includ- 
ing the  forms  which  we  have  exemplified.  Complete  Records  are  also  to  ac- 
company the  solution. 


Journal  Entries Di\ Cr. 

Entry  "A"  January  ist,  1920. 


L  I  Cash                                                                  $20,000.00 

L  2  Accounts  Receivable                                      15,000.00 

L3ia  Merchandise  Inventory                                  17,215.00 

L  9  Machinery  &  Equipment                                30,000.00 

L  10  To  Accounts  Payable                                                       $10,435.00 

L  II  To  Notes  Payable                                                                 4,500.00 

L  12  To  Undivided  Profits                                                          17,280.00 

L  13  To  Capital  Stock                                                                 50,000.00 

To  open  ledger  accounts,  per  trial  balance  given  as  at  January  ist. 


Entry.  "B" 

"       L  21     Depreciation  $187.50 

L  14         To  Reserve  for  Depreciation  $187.50 

For  the  month  of  January,  1920. 

9 

Lesson  Twenty-three 


Classification  of  Merchandise  Inventory  at  January  ist,  1920. 


Material 

Labor 

Product 

Dept.  A 

Dept.  B 

Dept.  A 

Dept.  B 

Overhead 

Total 

I 

$1,008.00 

$672.00 

$288.00 

$192.00 

$360.00 

$2,520.00 

2 

1,050.00 

700.00 

285.00 

190.00 

325.00 

2,550.00 

3 

1,440.00 

960.00 

294.00 

198.00 

408.00 

3,300.00 

4 

810.00 

540.00 

171.00 

114.00 

210.00 

1,845.00 

5 

1,140.00 

760.00 

204.00 

136.00 

480.00 

2,720.00 

6 

1,620.00 

1,080.00 

270.00 

180.00 

630.00 

3,780.00 

Raw  Materials 

L3 

500.00 

$7,068.00 

$4,712.00 

$1,512.00 

$I,OIO.OO 

$2,413.00 

$17,215.00 

L4 

L5 

L6 

L7 

L8 

L3ia 

10 

Lesson  Twenty-three 


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1—1 

Lesson  Twenty-three 


11 


Summary  of  Bills  of  Material 
January  1920. 


Material 

Product 

Units 
of 

. 

Product 

Dept.  A 

Dept.  B. 

Total 

Rate 

Amount 

Rate 

Amount 

Rate 

Amount 

1 

3200 

$1.68 

$5376 

00 

$1.12 

$3584 

00 

$2.80 

$8960 

00 

2 

1500 

2.10 

3150 

00 

1.40 

2100 

00 

3.50 

5250 

00 

3 

1000 

2.40 

2400 

00 

1.60 

1600 

00 

4.00 

4000 

00 

4 

1400 

2.70 

3780 

00 

1.80 

2520 

00 

4.50 

6300 

00 

5 

800 

2.85 

2280 

00 

1.90 

1520 

00 

4.75 

3800 

00 

6 

950 

3.60 

3420 

00 

2.40 

2280 

00 

6.00 

5700 

00 

7 

900 

3.66 

3294 

00 

2.44 

2196 

00 

6.10 

5490 

00 

$23700 

00 

$15800 

00 

$39500 

00 

L4 

L5 

L3 

Analys 

is  of  Pay 

Roll  January  1920. 

Description 

T3.,,r 

Operating  Dept. 

Indirect 
Labor 

Salaries 

X  ay 

Roll 

A. 

B. 

Supervision 

General 
Office 

Productive  La  be 
Productive  Labc 
Indirect  Labor 
Supervision 
Salaries  Genera 
Office 

)r,A 
)r,B 

1 

$6578 

4385 

7595 

800 

1945 

40 
60 
00 
00 

00 

$6578 

40 

4385 

60 

7595 

00 

800 

00 

1945 

00 

$21304 

00 

$6578 

40 

4385 

60 

7595 

00 

800 

00 

1945 

00 

C. 

B. 

L6 

L7 

L25 

L26 

L27 

SOLUTION  OF  PROBLEM  No.  2. 

Journal  entries,  A  &  B — previously  exemplified — copy  to  be  returned  by  the 
student. 

Schedule  of  Estimated  Costs — previously  exemplified,  copy  to  be  returned 
by  the  student. 

Classification  (Analysis)  of  Merchandise  Inventory,  previously  exemplified, 
copy  to  be  returned  by  the  student. 

Journal  entry  B — previously  exemplified — copy  to  be  returned  by  the  student. 

Purchase     Record — previously     exemplified — copy  to  be  returned  by  the 
student. 

Summary  of  Bills  of  Material — previously  exemplified — copy  to  be  returned 
by  the  student.  ', 

From  this  point  the  solution  follows  in  due  order  of  procedure. 

12 

Lesson  Twenty-three 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


TWENTY- FOURTH  LESSON 


Copyrighted  1921 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


TWENTY- FOURTH  LESSON 

Problem. 

Applicable  to  the  manufacture  of  special  orders,  the  costs  being  gathered 
against  each  order.  The  indirect  expenses  are  distributed  on  the  basis  of  the 
cost  of  direct  labor. 

Conditions  of  the  Problem  :• 

The  following  are  trial  balances,  at  January  i,  1920: 

General  Ledger 


Cash 

Accounts  Receivable 

Notes  Receivable 

Plant  and  Equipment 

Notes  Payable 

Vouchers  Payable 

Undivided  Profits 

Factory  Ledger 

Surplus 

Capital 


$22,150.00 

29,100.00 

2,000.00 

62,250.00 


42,500.00 


$158,000.00 


$  10,000.00 

32,500.00 

5,500.00 

10,000.00 
100,000.00 

$158,000.00 


Factory  Ledger 


Raw  Materials 
Work  in  Process 
General  Ledger 


$30,000.00 
12,500.00 

$42,500.00 


$42,500.00 
$42,500.00 


The  merchandise  inventories  at  January  i,  1920  showed  the  following  classi- 
fications: 


Cost 
$6,000.00 
4,000.00 
5,000.00 
6,000.00 
5,000.00 
4,000.00 


Raw  Materials 

Classification 

Quantity 

R.  M.  No.  I 

12,000 

R.  M.  No.  2 

10,000 

R.  M.  No.  3 

25,000 

R.  M.  No.  4 

30,000 

R.  M.  No.  5 

20,000 

R.  M.  No.  6 

40,000 

$30,000.00 


(Lesson  Twenty-Four) 


Work  in  Process 

Order  No.  Material  Labor  Overhead  Total 

1250  $5,750.00  $2,500.00  $500.00  $8,750.00 

1280  2,050.00  1,485.00  215.00  3,750.00 

$7,800.00  $3,985.00  $715.00  $12,500.00 

During  the  month  of  January,  1920,  the  following  special  orders  were  put  in 
work,  each  order  requiring  the  operation  as  shown: 

The  operations  are  to  be  considered  as  being  descriptive  only,  that  is,  although 
several  orders  may  undergo  the  same  descriptive  operation,  the  work  done  upon 
each  during  the  operation  may  vary.  The  costs  of  each  operation  are  to  be 
shown  upon  the  cost  sheets,  for  comparative  purposes  with  similar  operations 
in  the  past,  or  which  may  be  required  in  the  future. 

Order  No.  Operation  Completed  Operation  Required 

1250  I  2 

1280  1  3 

1281  I  and  2 

1282  2  and  3 

1283  I  and  4 

1284  3  and  4 

Additional  raw  materials  were  required.  Purchasing  instructions  were  issued 
January  5,  and  a  Purchase  Order  was  issued  January  6  (see  chapter  6  of  col- 
lateral reading),  the  materials — duly  received — being  in  accordance  therewith. 
The  following  are  the  details : 

Materials  Received 

Classification  Quantity  Price 

R.  M.  No.  I  20,000  •       .50 

R.  M.  No.  2  15,000  .40 

R.  M.  No.  3  30,000  .20 

R.  M.  No.  4  20,000  .20 

R.  M.  No.  5  30,000  .25 

The  above  stated  materials  received  January  10,  1920  were  included  in  one 
shipment,  freight  charges  being  $800.00. 

Each  class  of  material  is  to  bear  its  proportion  of  the  freight,  based  upon  the 
relation  of  its  individual  quantity  to  the  total  quantity  received. 

In  the  regular  course  of  actual  practice,  a  separate  production  order  would 
be  required  for  each  of  the  special  orders.  For  the  purpose  of  eliminating  the 
detail  which  would  be  required  if  separate  forms  were  prepared  for  the  solu- 
tion of  of  the  problem,  the  student  may  prepare  a  single  form  embracing  each 
order  with  distinctness.  (See  "Factory  Orders",  chapter  5  of  collateral 
reading.) 

The  details,  necessary  for  the  preparation  of  the  form,  are: 

Order  No.  1250 — Dated  Dec.  15,  1919 — wanted  Jan. 
Order  No.  1280 — Dated  Dec.  17,  1919 — wanted  Jan. 
Order  No.  1281 — Dated  Jan.  i,  1920 — wanted  Jan. 
Order  No.  1282 — Dated  Jan.  5,  1920 — wanted  Jan. 
Order  No.  1283 — Dated  Jan.  15,  1920 — wanted  Feb. 
Order  No.  1284 — Dated  Jan.  20,  1920 — wanted  Feb. 

4 


15. 

1920. 

18, 

1920. 

15, 

1920. 

18, 

1920. 

8, 

1920. 

12, 

1920. 

(Lesson  Twenty-Four) 

During  January,  Materials 

and 

Supplies  were  requisitioned,  as 

shown  by  the 

following  summary,  and  duly 

delivered  for  work 

upon  the  orders: 

Order  No. 

Description 

Quantity 

Operation 

Cost 

1250 

R.  M.  No.  I 

5.000 

No.  2 

$  2,521.50 

1280 

R.  M.  No.  2 

12,000 

No.  3 

4,850.08 

1281 

R.  M.  No.  3 

15,000 

No.  I 

3.057-00 

1281 

R.  M.  No.  I 

10,000 

No.  2 

5,043.00 

1282 

R.  M.  No.  5 

40,000 

No.  2 

10,168.00 

1282 

R.  M.  No.  4 

30,000 

No.  3 

6,084.00 

1283 

R.  M.  No.  6 

35>ooo 

No.  I 

3,500.00 

1283 

R.  M.  No.  I 

15,000 

No.  4 

7.564-50 

1284 

R.  M.  No.  2 

13,000 

No.  3 

5.254-26 

1284 

R.  M.  No.  3 

25,000 

No.  4 

5.095-00 

$53,137-34 

The  cash  transactions  for  the  month  were  as  follows: 

Cash  Received: 

From  Accounts  Receivable 
From  Notes  Receivable 


$32,194.60 
850.00 


Cash  Pa5mients: 

On  Vouchers  Payable  $45,120.10 

On  Notes  Payable  3,500.00 

In  order  to  avoid  the  necessity  for  preparing  a  form  of  Cash  book,  enter  the 
cash  transactions  in  the  Ledger  Account  "Cash"  and  post  therefrom. 

The  undermentioned  expenditures,  for  the  month  of  January  1920,  are  to  be 
entered  upon  a  Voucher  Register  (see  page  252  of  collateral  reading),  and 
posted  therefrom  to  the  General  Ledger,  or  to  the  Factory  Ledger,  as  the  case 
may  require.     "Vouchers  Payable"  is  to  be  credited  with  the  total. 


Raw  Materials 

Freight  on  Raw  Materials 

Supplies 

Repairs  and  Maintenance 

Insurance,  Factory 

Taxes,  Factory  property 

Stationery  and  Printing,  Factory 

Telephone  and  Telegrams,  Factory 

Light,  Heat  and  Power,  Factory 

Salaries,  Factory,  Office 

Superintendence,  Factory 

Direct  Labor 

Indirect  Labor 

Legal  Expense 

Light  and  Heat,  General  Office 

Sundry  Expenses,  General  Office 

Salaries,  Sales  Department 

Commission  to  Salesmen 

Traveling  Expenses,  Salesmen 

Advertising 

Salaries,  General  Office 

Total  Expenditures 


$33,500.00 

800.00 

450.00 

275.00 

175.00 

80.00 

35-00 

17.00 

212.00 

600.00 

250.00 

8,500.00 

750.00 

50.00 

30.00 

25.00 

800.00 

1,200.00 

2,400.00 

3,000.00 

2,400.00 

$55,549.00 


(Lesson   Twenty-Four) 


Depreciation,  at  the  rate  of  7J/2  per  cent  per  annum  is  to  be  provided — 
through  the  Journal — upon  the  amount  of  the  asset  value  of  Plant  and  Equip- 
ment, shown  by  the  trial  balance  at  January  1st.  The  entire  amount  is  to  be 
considered  as  an  indirect  factory  expense. 

The  factory  pay  roll  for  January  included  in  list  of  expenditures  previously 
given,  covered: 


Direct  Labor 
Indirect  Labor 
Superintendence 


$8,500.00 
750.00 
250.00 


The  direct  labor  (as  above)  was  compiled  from  time  reports,  summarized 
as  follows: 


Order  No.  1250 — Operation  No.  2 


1280 

3 

I28I 

I 

I28I 

2 

1282 

2 

1282 

3 

1283 

I 

1284 

( 

3 

$1,054.00 

1,081.00 

1,485.00 

1,270.00 

1,140.00 

890.00 

760.00 

820.00 

$8,500.00 


A  form  of  Pay  Roll  is  to  be  prepared,  which  will  suffice  to  record  the  fore- 
going details  as  to  the  wages  payable  only.    See  page  259  of  collateral  reading. 

The  production  orders  were  in  the  following  condition  at  January  31st: 

Order  No.  1250 — Completed 
"      1280  Do 

"      1281  Do 

"      1282  Do 

"        "      1283     In  process 
'      1284  Do 


The  Sales  during  January  were : 


Order  No.  1250 

"  1280 

"  1281 

"  1282 


$15,908.00 
12,536.86 
14,878.63 
23,817.66 


From  the  details  herein  given,  prepare  the  following: 

All  forms  necessary  to  record  the  transactions,  except  a  cash  book.  As 
previously  stated,  the  cash  account  in  the  Ledger  may  be  used  as  a  posting 
medium,  for  the  purpose  of  reducing  detail  work  upon  the  problem.  In  this 
connection  instead  of  providing  a  cost  sheet  for  each  order,  (as  would  ordin- 
arily be  required)  a  single  cost  sheet  may  be  used,  but  the  costs  for  each  order 
are  to  be  separately  shown. 

A  Profit  and  Loss  Statement  for  January. 

A  Balance  Sheet  at  January  31st,  1920. 

6 

(Lesson  Twenty-Four) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


TWENTY- FIFTH  LESSON 


Copyrighted  1921 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


TWENTY- FIFTH  LESSON 

PROBLEM. 

Illustrating  Special  Order  Method  for  finding  costs  of  a  specific  order,  sev- 
eral specific  orders  being  embraced  in  one  factory  order.  Indirect  expenses 
distributed  on  the  basis  of  direct  labor  cost. 


The  problem  given  in  the  preceding  lesson  dealt  with  special  order  costs, 
in  cases  Mrhere  the  costs  were  to  be  found  and  charged  to  each  order  sepa- 
rately. 

The  problem  for  the  present  lesson  deals  with  costs  for  similar  products, 
involving  several  customers'  orders  which  may,  nevertheless,  be  manufactured 
under  a  specific  factory  order,  and  the  costs  ascertained  for  and  charged  to  such 
factory  order. 

Conditions  of  the  Problem: 

The  classifications  to  be  accounted  for  are: 

Raw  Materials  Finished  Product 

R.  M.  No.  I  F.  P.  No.  500 

R.  M.  No.  2  F.  P.  No.  550 

R.  M.  No.  3  F.  P.  No.  600 

R.  M.  No.  4  F.  P.  No.  650 
R.  M.  No.  5 
R.  M  No.  6 

The  listing  of  the  classifications,  as  above,  is  not  to  be  considered  as  indi- 
cating any  particular  relation,  one  with  the  other.  Thus,  finished  product  No. 
500  may  require  several  different  classes  of  raw  material.  The  actual  relations 
between  the  classifications  will  be  appropriately  provided  for  in  the  conditions  of 
the  problem. 

The  month  of  January,  1920,  is  the  period  which  the  problem  accounts  for. 
The  merchandise  inventories  at  January  i,  1920,  showed  the  following  clas- 
sifications: 

Raw  Materials: 

Classification  Quantity  Cost 

R.  M.  No.  I  12,000  $6,000.00 

R.  M.  No.  2  10,000  4,000.00 

R.  M.  No.  3  25,000  5,000.00 

R.  M.  No.  4  30,000  6,000.00 

R.  M.  No.  5  20,000  5,000.00 

R.  M.  No.  6  40,000  4,000.00 


$30,000.00 

Work  in  Process — F.  P.  No.  loi — Not  operated  upon  during  January: 
Material  Labor  Overhead  Total 

$7,800.00  $3,985.00  $715.00  $12,500.00 

3 

(Lesson  Twenty-Five) 


Finished  Product : 


Classification  Quantity  Cost 

F.  P.  No.  500  200  $350.00 

F.  P.  No.  600  560  450.00 

F.  P.  No.  650  .  500  875.00 


$1,675.00 

In  order  to  provide  for  January  orders,  and  to  have  an  adequate  stock  of 
raw  materials,  a  purchase  requisition,  and  purchase  order,  are  assumed  to  have 
been  issued,  and  the  materials  duly  received  in  accordance  with  the  purchase 
order. 

The  details  of  these  transactions  were: 

Purchase  Requisition: 

Number  2120 — Dated  January  4,  1920 — addressed  to  J.  Kahn,  Purchasing 
Agfent,  Materials  wanted  January  8th,  Stock  Clerk^ — T.  Flint — Superintendent 
W.  Calder. 

The  requisition  covered: 

R.  M.  No.  I  Quantity  20,000 

R.  M.  No.  2  Quantity  15,000 

R.  M.  No.  3  Quantity  30,000 

R.  M.  No.  4  Quantity  20,000 


R.  M.  No.  5  Quantity  30,000 


Purchase  Order: 


Number  2200,  dated  January  5,  1920,  addressed  to  the  Evans  Mfg.  Co., 
Chicago.  The  prices  covered  by  the  order  were:  .50  (R.  M.  No.  i)  .40  (R.  M. 
No.  2)  .20  (R.  M.  No.  3)  .20  (R.  M.  No.  4)  .25  (R.  M.  No.  5). 

Shipment  was  to  be  made  via  N.  Y.  C.  Freight,  to  our  stores,  freight  to  be 
paid  by  shipper. 

The  materials  were  received  January  8th,  in  good  condition,  inspected  by 
S.  Burt. 

Production  Order  (Factory  Order) : 

(See  chapter  No.  5  of  collateral  reading.) 

Production  Order  No.  2360  (in  form  combined  for  use  also  as  a  cost  sheet) 
was  issued  January  4th,  covering  the  following: 

Product 
F.  P.  No.  500 
F.  P.  No.  550 
F.  P.  No.  600 
F.  P.  No.  650 

Material  Requisitions: 

(See  page  82  of  collateral  reading.) 

A  material  requisition  was  issued  January  4th,  which  covered  the  following 
details. 

4 

{Lesson  Twenty-Five) 


Units  Required 

Particulars 

15,000 

Wanted  Jan.  15th 

20,000 

Wanted  Jan.  20th 

30,000 

Wanted  Jan.  25th 

30,000 

Wanted  Feb.  12th 

Product  to  DC 
Manufactured 
F.  P.  No.  500 
F.  P.  No.  550 
F.  P.  No.  600 
F.  P.  No.  500 
F.  P.  No.  600 
F.  P.  No.  650 

The  office  was  duly  advised  that  the  production  of  F.  P.  No.  500,  550  and 
600  was  completed,  the  following  being  a  summary : 


Material 

Required 

Kind 

Quantity 

R.  M.  No.  I 

25,000 

R.  M.  No.  2 

20,000 

R.  M.  No.  3 

45,000 

R.  M.  No.  4 

35,000 

R.  M.  No.  5 

30,000 

R.  M.  No.  6 

10,000 

Production : 

Material  Used 

Product 

Kind 

Quantity 

Direct  Labor 

F.  P.  No.  500 
F.  P.  No.  =;oo 
F.  P.  No.  550 
F.  P.  No.  600 
F.  P.  No.  600 

R.  M.  No.  I 
R.  M.  No.  4 
R.  M.  No.  2 
R.  M.  No.  3 
R.  M.  No.  5 

25,000 
35,000 
20,000 
45,000 
30,000 

$3,212.74 
2,502.12 
5,027.88 
4,001.08 
2,756.26 

$17,500.08 

The  following  expenditures  were  made  during  the  month  (January,  1920) 
which  are  to  be  entered  upon  a  Voucher  Register  (see  page  252  of  collateral 
reading)  and  posted  therefrom  to  the  appropriate  ledger,  a  general  ledger  and 
factory  ledger  being  kept. 

"Vouchers  Payable"  is  to  be  credited  with  the  total  of  the  expenditures: 


Raw  Materials 

$33,500.00 

Repairs  and  Maintenance, 

Factory 

275.00 

Insurance,  Factory 

175.00 

Insurance,  General  Office 

25.00 

Taxes,  Factory  property 

80.00 

Stationery  and  Printing,  Factory 

3500 

Stationery,  General  Office 

15.00 

Telephone  and  Telegrams,  General  Office 

1475 

Telephone,  Factory 

17.00 

Light,  Heat  and  Power,  Factory 

212.00 

Light  and  Heat,  General  Office 

30.00 

Salaries,  Factory 

600.00 

Salaries,  Sales  Department 

800.00 

Salaries,  General  Office 

2,400.00 

Sundry  Expenses,  Factory 

5-50 

Sundry  Expenses,  General  Office 

25.00 

Legal  Expense 

50.00 

Commissions  to  Salesmen 

1,200.00 

Traveling  Expenses,  Salesmen 

2,400.00 

Advertising 

3,000.00 

Carried  forward 

$44,859-25 

.5 

{Lesson  Twenty-Five) 

Brought  forward  $44,859.25 

Pay  Roll — Factory: 

Direct  Labor  $19,210.20 

Indirect  Labor  712.18 

Superintendence  250.00  20,172.38 


Total  Expenditures  $65,031.63 

The  following  Trial  Balances  were  shown  by  the  Ledgers  at  the  commence- 
ment of  the  period,  January  i,  1920: 

General  Ledger: 

Cash  ,  $16,650.00 

Accounts  Receivable  29,100.00 

Notes  Receivable  2,000.00 

Plant  and  Equipment  62,250.00 

Notes  Payable  $10,000.00 

Vouchers  Payable  34,175.00 

Factory  Ledger  44,175.00 

Surplus  10,000.00 

Capital  100,000.00 


$154,175.00  $154,175.00 

Furniture  and  fixtures,  provisions  for  depreciation,  and  the  possibility  of 
bad  debts,  have  purposely  been  omitted,  in  order  to  shorten  the  problem. 

Factory  Ledger: 

Raw  Materials  $30,000.00 

Work  in  Process  12,500.00 

Finished  Product  1,675.00 

General  Ledger  $44,175.00 


$44,175.00  $44,175.00 

The  cash  transactions  during  January  were: 

Cash  received 

From  Accounts  Receivable  $32,194.60 

From  Notes  Receivable  850.00 

Cash  Payments 

On  Vouchers  Payable  45,120.10 

On  Notes  Payable  3,500.00 

In  order  to  avoid  the  necessity  for  preparing  a  form  of  Cash  book,  enter  the 
cash  transactions  directly  in  the  Ledger  Account  "Cash"  and  post  therefrom. 

The  Sales  during  January  were: 

10,000  of  F.  P.  No.  500  $25,000.00 

20,000  of  F.  P.  No.  550  19,000.00 

20,000  of  F.  P.  No.  600  24,000.00 

From  the  details  hereinbefore  given,  provide  all  of  the  forms,  Journal 
Entries  and  Ledger  Accounts  necessary  for  recording  the  transactions  in  a 
manner  to  clearly  show  the  solution  of  the  problem  with  respect  to : 

Trial  balances  of  the  Ledgers  at  January  31st. 
Manufacturing  and  Profit  and  Loss  Statement  for  January. 
Balance  Sheet  as  at  January  31st. 

6 

(Lesson  Twenty-Five) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


TWENTY-SIXTH  LESSON 


Copyrighted  1921 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


3a5t  ;  an. 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


LESSON  TWENTY-SIX 


Problem 

The  problems  given  in  the  last  two  lessons  dealt  with  costs  charged  directly 
against  a  customer's  order,  and  with  costs  charged  directly  against  a  Factory 
Order  which  enveloped  several  customers'  orders  for  similar  product,  the  costs 
of  the  separate  customer's  orders  being  an  average  cost.  The  present  problem 
deals  with  the  costs  of  product  continuously  manufactured  for  stock.  Under 
these  conditions  a  customer's  order  is  filled  from  stock,  the  order,  therefore,  is 
not  directly  identified  with  the  product  durin.g  manufacture. 

CONDITIONS  OF  THE  PROBLEM 

Three  departments  are  involved, — A,  B,  C,  and  the  costs  of  each  are  to  be 
accounted  for. 

Indirect  Expenses: 

General  Indirect  Expenses  are  to  be  distributed  to  departments  on  the 
basis  of  direct  labor  cost.     Department  Indirect  Expenses  are  to  be  dis- 
tributed on  the  basis  of  direct  labor  costs. 
Cost  Period:     Is  the  month  ended  June  30,  1919. 

Inventories  at  May  31,  19 19: 

Ravr  Materials 


Class 
R.  M.  No.  3 
R.  M.  No.  5 
R.  M.  No.  7 


Class 
No.  105 
No.  106 
No.  107 


Class 
No.  800 
No.  805 
No.  820 
No.  910 


Quantity  (lbs.) 
6376 
4120 
5240 


Price 

$  .40 

.40 

•65 


Part  Finished  Stock 

Quantity  Cost 

1520  $1.02 

935  2.10 

2040  .95 


Finished  Product 


Quantity 
250 
230 

325 
410 


Work  in  Process 


Department  A 
Department  B 
Department  C 


Cost 

$3-705 
4. 1 14 

3-547 
6.250 


$9527-33 
2923.44 

2287.16 
$14737-93 


Amount 

$2550.40 

1648.00 

3406.00 

$7604.40 


Amount 

$1550.40 

1963.50 

1938.00 

$5451-90 

Amount 

$    926.25 

946.22 

1152.77 

2562.50 

$5587-74 


(Lesson  Twenty-Six) 


Factory  transactions  during  June: — 
Summary  of  Materials  Received: 


Class 
R.  M.  No.  3 
R.  M.  No.  5 
R.  M.  No.  7 


Quantity  (lbs.) 
25,000 
25,000 
20,000 


Price 

$  .40 

.40 

•65 


Summary  of  Materials  delivered  to  departments: 

Quantity  (lbs.)  Price 

30,000  $  .40 

20,000  .40 

15,006  .65 


Summary  of  Department  Reports  of  Materials  Used 


Class 

Dept 

R.  M.  No.  3 

A 

R.  M.  No.  5 

B 

R.  M.  No.  7 

C 

Amount 

$10,000.00 

10,000.00 

13,000.00 

$33,000.00 


Amount 

$12,000.00 

8,000.00 

9,750.00 

$29,750.00 


Class 


Dept. 


R.  M.  No.  3 

A 

R.  M.  No.  5 

B 

R.  M.  No.  7 

C 

R.  M.  No.  3 

C 

Material  used 
(lbs.) 
20,724 

15.307 
8,997 
4,500 


Summary  of  Inter-Departmental  Material  Reports 


Materials  transferred 
From  Dept.  A  to  Dept.  C 


Class 
R.  M.  No.  3 


Quantity  (lbs.) 
4500 


Summary  of  Indirect  Expenses 

Department  A  $410.20 

Department  B  380.80 

Department  C  209.00 


Total  for  Departments 
General  Indirect  Expenses 

Total 


$1,000.00 
720.40 

$1,720.40 


As  previously  stated,  the  indirect  expenses  are  to  be  distributed  on  the  basis 
of  direct  labor  cost.  The  student  is  requested  to  prepare  a  statement  covering 
the  distribution. 

Direct  Labor — per  analysis  of  Pay  Roll 

Department  A  $2,174.04 


Department  B 
Department  C 


2,252.50 
2,650.00 

$7,076.54 


Summary  of  Part  Finished  Product  Transferred  from  Operating  Departments 

to  Stores 

From 

Dept. 

A 

B 


Class 
No.  105 
No.  106 


Quantity 

357 
421 


Material 

$210.00 

598.00 


Labor 
$120.00 
225.00 


Overhead 


XLesson  Twenty-Six) 


The  student  is  to  supply  the  overhead  cost  from  the  statement,  which  he  is 
to  prepare  of  the  overhead  distribution. 

Summary  of  Production — Finished  Product 

Dept.  Class  Quantity  Materials  Labor  Overhead 

A  No.  800                700  $1,569.75  $    792.50                 

A  No.  805                350  973-85  361.20                 

B  No  .820                850  2,096.80  722.50                 

C  No.  910               980  4,649.45  1,250.00                 

$9,289.85  $3,126.20  

The  student  is  to  supply  the  overhead  cost  from  the  statement,  which  he  is 
to  prepare,  of  the  overhead  distribution. 

The  following  Trial  Balances  of  the  General  Ledger  exhibit  the  accounts 
of  each  period,  after  all  transactions  have  been  entered.  The  Balances  at  May 
31st  do  not  contain  any  Profit  and  Loss  items.  The  Balances  at  June  30th 
represent  the  ledger  before  the  Profit  and  Loss  Account  has  been  prepared. 

Trial  Balances  of  General  Ledger 


ACCOUNT 


Cash 

Accounts  Receivable 

Accounts  Payable 

Plant  and  Equipment 

Office  Furniture  and  Fixtures 

Administrative  Expenses 

Selling  Expenses 

Reserve  for  Depreciation 
Plant  and  Equipment 
Office  Furniture  &  Fixtures 

Surplus 

Undivided  Profits 

Capital  Stock 

Factory  Ledger 

Sales 

Cost  of  Sales 


May  31 


DR. 


$16,120 
49,039 

45,270 
2,500 


33,381 


$146,312 


70 
48 

00 
00 


97 


CR. 


$21,240 


3,120 

320 

15,000 

6,631 

100,000 


15      $146,312 


18 


00 
00 
00 
97 
00 


15 


June  30 


DR. 


$9,447 
50,303 

45,270 
2,500 
1,500 
2,500 


60,041 
15,137 


$186,699 


16 
08 

00 
00 
00 
00 


04 

87 


15 


CR. 


$39,000 


3,346 

340 

15,000 

6,631 

100,000 

22,380 


$186,699 


00 


35 
83 
00 
97 
00 

00 


15 


Class 
No.  800 
No.  805 
No.  820 
No.  910 


A  Summary  of  the  Sales  Showed  the  Following 

Quantity  Price  Amount 


800 

$5-50 

$  4,400.00 

350 

6.25 

2,187.50 

1000 

5-27 

5,270.00 

1 150 

915 

10,522.50 

$22,380.00 


The  student  is  not  required  to  prepare  any  Factory  forms  in  connection 
with  the  solution  of  the  problem,  the  forms  having  been  exemplified  by  previous 
problems. 


(Lesson  Twenty-Six) 


The  following  statements  are  to  be  prepared: 

(i)  Trial  Balance  of  the  Factory  Ledger  at  May  31,  1920. 

(2)  Distribution  of  Indirect  Expenses  (Full  details). 

(3)  Cost  of  the  Sales  (Full  details). 

(4)  Manufacturing  and  Profit  and  Loss  Statement  for  June. 

(5)  Analysis  of  Profit  and  Loss  Statement. 

(6)  Balance  Sheet  at  June  30,  1919. 


(.Lesson  Twenty-Six) 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


TWENTY-SEVENTH    AND 
TWENTY-EIGHTH  LESSONS 


Copyrighted   1921 
J.  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


This  lesson  ts  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


TWENTY-SEVENTH  AND  TWENTY-EIGHTH  LESSONS 

PROBLEM 

Products  manufactured  from  Asbestos : 

The  problem  is  based  upon  the  Special  Order  and  Product  Methods  of  man- 
ufacturing, and  upon  the  following  systems  of  cost  finding: 

Machine  Cost. 
Process  labor  cost. 
Productive  labor  hours. 
Productive  labor  cost. 

The  following  facts  and  figures  have  been  obtained  from  the  accounts  and 
records  of  the  A-B-C  Manufacturing  Company — Manufacturers  of  brakes,  brake 
bands,  and  brake  lining — during  the  three  months  ended,  March  31,  1919.  The 
operating  departments,  manufacturing  methods,  and  cost  finding  systems  are  as 
follows : 

Operating  Dep't  Mf'g  Method  Cost  Finding  System 

No,  I — Power 

No.  2 — Weaving  Product  method  Machine  Cost 

No,  3 — Treating  Product  method  Process  Cost 

No.  4 — Brake  Special  Order  Machine  Cost 

No.  5 — Assembling  Special  Order  Productive  Labor  Hours 

General  Operating  Expenses  are  distributed  on  the  basis  of  productive  labor 
cost. 

The  following  details  cover  the  balances  of  the  Ledgers  at  January  i,  1919, 
and  the  expenditures  during  the  three  months  ended,  March  31,  1919, 


Balances  of  General  Ledger 

at  January  i, 

1919. 

Dr. 

Cr. 

Cash 

$    2,000.00 

Notes  Receivable 

25,000.00 

Accounts  Receivable 

81,000.00 

Factory  Ledger 

79,232.10 

Plant 

100,000.00 

Vouchers  Payable 

$  11,215.10 

Notes  Payable 

66,490.00 

Reserve  for  Bad  Debts 

4,000.00 

Reserve  for  Depreciation- 

-Plant 

9,300.00 

Reserve  for  Discount 

2,430.00 

Capital  Stock 

175,000.00 

Surplus 

18,797.00 

$287,232.10 

$287,232.10 

Lesson  Twenty-seven 


Balances  of  Factory  Ledger 
at  January  i,  1919. 

Dr.  Cr. 

Raw  Material:  $34,000.00 

Yarn — 64,000  lbs.  at  25c         $16,000.00 
Steel — 54,000  lbs.  at  33%c         18,000.00 


$34,000.00 

Finished  Stock — B                            ~°  10,846.42 

Finished  Stock — B  L  15,161.78 

Finished  Stock — B  B  8,223.90 

Department  No.  i — Coal  on  hand  750.00 

Department  No.  2 — Supplies  on  hand  3,675.00 

Department  No.  3 — In  process  3,175.00 

Department  No.  4 — Supplies  on  hand  1,150.00 

Department  No.  5 — In  Process  2,250.00 

Material  $1,250.00 

Direct  Labor         750.00 

Overhead  250.00 


$2,250.00 
General  Ledger  "  $79,232.10 

$79,232.10  $79,232.10 


Lesson  Twenty-seven 


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300,000  pounds 
75,000  lbs.  stee 
Direct  labor 
Indirect  labor 
Supplies 
Repairs  and  M 
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Lesson  Tiventi'-seven 


Details  of  Cash  Receipts  and  Payments 
for  the  3  mos,  ended  March  31,  191 9. 
Cash  Receipts 

From  Accounts  Receivable  (Discount  $14,250.00)  $460,750.00 

From  Notes  Receivable  25,000.00 


Total  $485,750.00 

Cash  Payments 

Vouchers  Payable  (Discount  $3,851.43)  124,529.67 

Notes  Payable  66,490.00 

Pay  Roll  91,000.00 

Dividends  35,000.00 

Advertising  65,000.00 

Taxes  2,000.00 

Telegraph  &  Telephone  700.00 

Traveling  Expenses  10,000.00 

Salaries — Salesmen  20,000.00 

Salesmen's  Commissions                                  -  10,000.00 

Salaries — General  Office  18,000.00 

Salaries — Officers  30,000.00 

Legal  Expense  2,000.00 

Sundry  Expenses  3,000.00 


Total  $477,719.67 

All  items  in  the  statement  of  Factory  Expenditures  are  to  be  credited  to 
Vouchers  Payable  except  that  the  total  amount  for  labor  is  to  be  credited  to 
"Pay  Roll"  in  the  General  Ledger. 

The  following  items,  not  included  in  Factory  Expenditures,  are  to  be  cred- 
ited to  Accounts  Payable  and  charged  to  appropriate  accounts  in  the  General 
Ledger : 

Insurance  $2,000.00 

Stationery,  Printing  Postage  1,500.00 

Freight,  Express,  Cartage  2,800.00 

Charges  for  the  following  are  to  be  provided  for: — 

Depreciation  of  Buildings  &  Machinery 

8%  per  annum — Departments  No.  i  and  No.  4. 
10%  per  annum — Departments  No.  2,  No.  3  and  No.  5. 

Interest  on  Capital— Buildings,  Machinery  &  Equipment 
6%  per  annum,  on  the  valuation  of  each  department. 
For  the  purpose  of  arriving  at  the  above  stated  charges,  the  Plant  Account 
has  been  divided,  as  follows: 

Departmental  division  of  Plant 

Dept.  Dept.  Dept.         Dept.         Dept. 

Plant  Total  No.  i  No.  2  No.  3  No.  4         No.  5 

Buildings      $53,000.00  $12,000.00  $15,000.00  $10,000.00  $12,000.00  $4,000.00 
Mach'y  Tools 
and  sprinkler 

system  47,000.00      8,000.00     20,000.00     15,000.00      3,000.00     1,000.00 


$100,000.00  $20,000.00  $35,000.00  $25,000.00  $15,000.00  $5,000.00 


Lesson  Twenty-seven 


Distribution  of  General  Operating  Expenditures 

Distribute  the  expenditures  to  Departments  No.  i,  No.  2,  No.  3,  No.  4,  No.  5, 
according  to  the  direct  labor  charged  to  each  Department.  The  percentage  to 
be  used  for  the  purpose,  is  approximately  38.4. 

Details  from  the  Power  Department 

Department  Horse-power  used  Running  time 

No.  2  50  18,000  hrs. 

No.  3  40  18,000  hrs. 

No.  4  5  3,000  hrs. 

No.  5  5  3,000  hrs. 

The  rate  on  total  horse-power  hours  was  .0081272. 

Summary  of  Material  Requisitions 

Raw  materials  were  delivered  as  follows: 

To  the  Weaving  Dep't — 310,000  pounds  of  yarn. 
To  the  Brake  Dep't — 81,000  pounds  of  steel. 

Production  of  Weaving  Department 

297,000  pounds  net  of  Brake  Lining. 

The  waste  of  no  value — amounted  to  3,000  pounds. 

A  new  rate  was  established  for  cost  of  yarn,  viz. :  25J4  cents  per  pound. 

The  total  running  time  of  the  machines  was  18,000  hours,  the  charges  for 
the  period  were  $52,805.48,  the  rate  being  approximately  $2.9336  per 
machine  hour. 

Taking  into  consideration  the  work  in  process  at  January  i,  1919 — the 
total  machine  hours  on  production  were  18,100,  and  the  rate  of  $2.9336 
per  hour  was  established. 

From  the  above  stated  details,  calculate  and  journalize  the  costs  to  show: 

Material — Cost  and  rate 

Operating  Expenses — Cost  and  rate. 

Cost  of  weaving — per  pound,  total  cost,  and  rate. 

Cost  of  weaving — Total  transferred  to  the  Treating  Department. 

Production  of  Treating  Department 

The  production  of  the  department  was  298,000  pounds. 

After  passing  through  the  department,  five  feet  of  Brake  Lining  are  equal 
to  one  pound. 

Details  relating  to  the  Treating  Department 

Inventory  at  March  31,  1919,  was  $  2,303.94 
Cost  of  production  was  33,082.64 

In  preparing  the  entries,  summarize  the  foregoing  details  so  as  to  show: 

How  the  cost  is  obtained. 

The  cost  per  pound  for  Treating. 

The  cost  per  foot  for  Treating. 

Total  cost  of  Weaving  and  Treating,  by  pounds  and  feet. 

7 

Lesson  Twenty-seven 


Details  relating  to  the  Treating  Department — Continued 

1,400,000  feet  at  10.817  cents  per  foot  were  transferred  to  Finished  Stock — 
B.  L. 

90,000  feet  at  10.817  cents  per  foot  were  transferred  to  the  Brake  Department. 
15,000  feet  of  Brake  Lining  were  transferred  from  Finished  Stock — B.  L. 
to  the  Brake  Department. 

Production  of  the  Brake  Department 

Of  Brakes  •  14,000 

Of  Brake  Bands  16,000 

In  each  Brake  there  are  four  pounds  of  steel,  and  three  feet  of  Lining. 
In  each  Brake  Band  there  are  1 5^  pounds  of  steel,  and  3  feet  of  Lining. 

Machine  hours 

On  Brakes  18,000  hours 

On  Brake  Bands  18,000  hours 

hours 


Total  36,000 

The  charges  for  the  period  were  $16,978.91. 

The  machine  rate,  therefore,  was  47.163  cents  per  hour. 

Journalize  the  stated  details,  so  as  to  show  the  following  separately  for 
Brakes  and  for  Brake  Bands: 

Weaving,  Treating,  and  Steel  Cost. 

Brake  Department  Operating  Cost. 

Total  Cost,  and  rate  per  Brake  and  Brake  Band. 

Rate  for  Brakes — 47.163  cents  per  hour. 

Rate  for  Brake  Bands  47.163  cents  per  hour. 

The  total  cost  of  production  of  the  Brake  Department  is  transferred  to  the 
Assembling  Department,  such  cost  being  $53,380.82. 

From  the  details  given  show  the  following: 

Cost  of  Treating. 

Cost,  and  rate  of  Brakes. 

Cost,  and  rate  of  Brake  Bands. 

Total  production  cost  of  Brakes. 

Total  production  cost  of  Brake  Bands. 

Production  of  the  Assembling  Department 

Of  Brakes  14,100 

Of  Brake  Bands  13,900 

Journalize  the  following,  to  separately  show  the  cost : 

Department  cost  for  Brakes  $2.26423 

Department  cost  for  Brake  Bands  I-355I 

Department  Direct  labor  for  each. 

Department  Operating  expenses  for  each. 

Total  cost  of  each. 

Rates  for  Brakes  $2.94728 

Rate  for  Brake  Bands  2.04135 

8 

Lesson  Twenty-seven 


In  process  at  March  31,  1919 

Material  $3,861.54 

Labor  1,750.00 


Total  $5,611.54 

Productive  Labor  hours 

On  Brakes  20,000  hours,  average  30  cents  per  hour. 

On  Brake  Bands  25,000  hours,  average  20  cents  per  hour. 

Total,  labor  hours  45,000 

The  total  department  charges  for  the  period  showed  a  labor  hour  rate  of 
18.1554  cents. 

Summary  of  Sales  and  Cost  of  Sales 

Sales  Cost  of  Sales 

1,380,000  feet  of  Brake  Lining 

at  20  cents  per  foot.  10.817  cents  per  foot. 

16,000  Brakes  at  $6.00  each  $2.94728  each 

16,500  Brake  Bands,  at  $5.25  each  $2.04135  each 

The  Reserve  for  Bad  Debts  is  to  be  adjusted  so  that  the  balance  will  equal 
3%  of  the  ending  balance  of  the  Accounts  Receivable. 

A  Reserve  for  Discount  is  to  be  made,  the  net  of  which  will  about  equal 
3%  of  the  balance  of  Accounts  Receivable,  and  of  Accounts  Payable,  at  March 
31,  1919. 

Division  of  the  Solution 

The  solution  of  the  problem  will  probably,  require  more  time  than  is  avail- 
able within  the  period  devoted  to  a  single  lesson,  we  therefore  apply  the  prob- 
lem as  lessons  27  and  28,  the  solution  to  be  divided  as  follows: 

Solution  required,  as  lesson  27 

(i)  The  journal  entries  for  General  Journal  and  factory  journal,  neces- 
sary, for  opening  the  general  and  factory  ledgers  at  January  i,  1919. 

(2)  The  journal  entries  necessary  to  set  up  the  reserve  for  depreciation 
in  the  general  ledger,  and  the  charges  for  depreciation  in  the  fac- 
tory ledger. 

(3)  The  Journal  entries  necessary  to  set  up — in  both  ledgers — the 
charges  for  interest  on  Capital  invested  in  Buildings,  Machinery  and 
Equipment. 

Entries  in  the  factory  journal,  and  in  the  General  Journal  are  to  be  sep- 
arate, so  that  they  may  be  collected  in  proper  sequence  for  the  entire  problem. 

Solution  required  as  lesson  No.  28 

(i)  All  necessary  entries  for  completing  the  solution  of  the  Problem. 

(2)  Prepare  and  fill  out  the  summarizing  records,  so  that  postings  may  be 
shown  therefrom  directly  to  the  ledger  accounts  affected  thereby. 

The  records  required  are: 

Journal  entries. 

Ledger  Accounts. 

Register  of  Accounts  Payable. 

9 

Lesson  Twenty-seven 


Solution  Required  as  Lesson  No.  28 — Continued 

One  Stock  Record,  showing  each  classification.  Ordinarily  a  separate 
Record  would  be  required  for  each  classification.  A  single  Record, 
however,  will  suffice  for  the  purposes  of  the  problem. 

Power  Cost  and  Distribution. 

Summary  of  Material  Requisitions. 

Pay  Roll — Classified. 

Summary  of  Sales  &  Costs. 

Trial  Balances  of  both  Ledgers  at  March  31,  1919. 

Profit  &  Loss  Statement  for  the  3  mos.  ended  March  31,  1919. 

Balance  Sheet  at  March  31,  191 9. 


10 

Lesson  Twenty-seven 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


TWENTY-NINTH  LESSON 


Copyrighted  1921 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


""p 


n'~) 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


TWENTY-NINTH  LESSON 

SUBJECT:    GRAPHICAL  PRESENTATION  OF 
STATISTICAL  INFORMATION. 

The  managers  of  present  day  industrial  enterprises  are  confronted  by  a 
volume  and  complexity  of  problems  which  renders  necessary  prompt  statistical 
information  of  every  operation  from  the  receipt  of  raw  material  to  the  collec- 
tion of  accounts  due.  Quick  and  correct  decisions  of  policy  are  dependent  upon 
statistical  information  relating  to  each  element  which  tends  to  increase  or  de- 
crease the  profits  of  a  business,  from  the  costs  of  labor,  material  and  overhead 
to  far-reaching  outside  influences.  By  a  careful  study  of  statistical  informa- 
tion, both  regarding  his  own  business  and  the  business  world  in  general,  the 
executive  can  utilize  the  experience  of  today  and  yesterday  and  be  aided  in  fore- 
casting the  future,  using  the  result  as  an  indicator  of  what  he  may  expect  to 
occur  tomorrow  in  relation  to  his  own  business. 

The  business  executive  is  called  upon  at  every  hour  of  the  day  to  pass  his 
judgment  upon  problems  laid  before  him.  Unless  the  problems  are  presented 
in  accurate  and  concise  form  his  decision  is  apt  to  be  based  on  guess  work 
rather  than  fact.  In  order  to  meet  his  needs  the  intricate  problems  that  con- 
front him  should  be  analyzed,  and  condensed  reports  worked  up  in  proper 
form  and  placed  on  his  desk  to  provide  an  acceleration  of  his  work. 

The  preparation  of  statistical  information  should  begin  with  the  executives 
in  subordinate  positions,  who  should  prepare  summaries  of  the  details  for  which 
they  are  responsible.  These  summaries  should  be  passed  on  to  a  higher  execu- 
tive who  will  combine  his  report  with  many  others  for  which  he  is  responsible, 
and  pass  the -essential  facts  to  the  management.  These  summaries  and  reports 
should  be  assembled  in  as  simple  a  form  as  possible  in  order  that  the  manager 
may  grasp  the  total  of  production,  or  expense,  or  sales,  or  collections.  As  he 
is  concerned  only  with  broad  results,  the  figures  at  the  end  of  the  report  must 
be  accurate.  If  they  appear  unsatisfactory,  he  should  be  able  to  trace  back- 
ward through  the  statistics  and  ascertain  the  deficiency. 

Reports,  however  concise  they  may  be,  will  reach  the  limit  of  their  ex- 
pressiveness in  the  use  of  language  for  the  conveyance  of  facts.  The  statis- 
tical reports  should  be  supplemented  with  an  appeal  to  the  eye  by  means  of 
graphical  charts  of  various  kinds. 

Graphic  methods,  providing  their  proportions  are  correct,  present  essential 
relationships  at  a  glance.  They  enable  the  executive  to  base  his  opinion  on 
facts.  All  along  the  line,  as  the  reports  have  been  compiled  each  subordinate 
has  functioned  as  a  cog  in  the  wheel  of  organized  thinking  by  summarizing 
the  myriads  of  details  in  order  that  the  essential  facts  may  be  brought  to  the  at- 
tention of  the  chief  executive. 

The  chief  executive,  in  order  to  administer  his  business  effectively  should 
have  before  him  at  all  times  in  graphical  form  the  following: 

1.  Material  costs,  classified  as  to  kinds. 

2.  Inventories,  classified  as  to  kinds. 

3.  Wastes,  scrap,  spoiled  work,  rejections,  etc. 

4.  Labor  turnover. 

•  3 

Tzventy-ninfh  Lesson 


5-  Overhead  expenses,  departmental  and  general. 

6.  Manufacturing  costs. 

7.  Sales  costs,  classified  as  to  lines. 

8.  Sales,  orders,  deliveries. 

9.  Profits  and  dividends. 

In  addition  to  the  foregoing,  the  department  head  should  prepare  graphical 
charts  by  means  of  w^hich  the  operations  of  his  department  will  be  shown  in 
greater  detail. 

The  sales  manager  can  plot  the  total  volume  of  his  orders,  can  show  the 
comparative  territorial  volumes,  the  various  commodity  volumes,  and  the  rev- 
enues from  the  sales  of  each. 

The  purchasing  agent  can  show  the  market  price  of  certain  materials  or 
commodities  and  the  amount  used  in  the  plant  as  an  aid  in  placing  orders. 

The  advertising  manager  by  a  graphical  chart  can  show  the  inquiries  and 
business  secured  through  different  advertisements  and  mediums. 

The  production  manager  can  stimulate  the  workmen  to  greater  incentive, 
by  placing  in  a  convenient  place  where  all  may  see  it,  comparative  symbols 
showing  the   production  of  today  over  yesterday. 

The  cost  accountant  with  the  facts  and  figures  of  manufacturing  costs 
before  him  can  present  invaluable  information  to  the  chief  executive.  He  can 
supplement  his  reports  with  clear  and  interesting  graphical  charts  which  will 
show  quantitative  facts  in  true  proportions  and  give  instantly  the  correct  in- 
terpretation. Valuable  figures  might  be  laboriously  prepared,  yet  they  have 
little  value  unless  studied  as  an  aid  to  administrative  guidance.  A  simple  chart 
would  convey  the  facts  more  quickly  and  accurately  than  the  most  elaborately 
written  report. 


Kinds  of  Charts: 

The  horizontal  bar  is  an  especially  good  method  of  showing  the  component 
parts  of  a  total.  The  total  length  of  the  bar  represents  100%,  and  the  various 
component  elements  of  the  total  are  shown  as  segments  of  the  bar.  For  the 
purpose  of  illustration  we  will  assume  a  hypothetical  case  as  follows: 


Direct  Material  Cost 
Direct  Labor  Cost 
Indirect  Charges 

Manufacturing  Costs 


$100.00  20% 
200.00  40% 
200.00    40% 


$500.00  100% 


20% 


40% 


<(?% 


DIRECT 

MATERIAL 

COST 


DIRECT  LABOR  COST 


INDIRECT  CHARGES 


/oo% 


MANUFACTURING      CO^TS 


TffdjJMfii-fi  iMf /i     /  i>cr/lM 


The  same  information  can  be  presented  in  the  form  of  a  circle,  the  total 
area  of  which  represents  ioo%,  and  the  elements  of  costs  mentioned  occupy- 
ing segments  of  20  per  cent,  40  per  cent,  and  40  per  cent  respectively. 


By  dividing-  the  surface  of  a  circle  into  sectors,  the  constituent  elements  of 
a  report  may  be  shown  in  graphical  form,  but  it  is  not  a  desirable  form  of  pre- 
sentation, however,  because  it  does  not  have  nearly  such  flexibility  as  the  bar 
or  straight  line  method. 

The  bar  is  also  an  excellent  device  tor  presenting  relative  time  studies  on 
operations.  The  quantity  produced  in  a  given  time  by  different  operators  may 
be  graphically  represented  in  detail  and  comparisons  made  clearly  showing 
the  facts.  A  comparison  may  also  be  made  of  the  relative  time  for  the  various 
operations  performed  by  two  or  more  workmen  at  the  same  machine  or  on  the 
same  jobs.  By  way  of  illustration  we  will  assume  the  following  time  was  spent 
in  the  various  movements  by  two  workmen  on  the  same  operation  in  the  manu- 
facture of  handles:  J 

Movement  i  Reaches  for  rough  handle. 

2  Places  in  jig. 

3  Closes  jig. 

4  Depresses  handle  against  polishing  belt. 

5  Raises  jig. 

6  Opens  jig. 

7  Extracts  handle  tossing  it  in  tote  box. 


Time  on  each  movement. 


Work 

man 

No.  I 

Movement 

I 

2 

seconds 

2 

3 
4 

4 
2 

14 

^ 

*T^ 

s 

4 

, 'V  .'■"•,f,-"-?rit*7 .    « 

6 

I 

«     a 

2 

7 

6 

Total  Time 

34 

Tifciily-iimth  Lesson 

Workman  No.  2 

3  seconds 
6 

3         " 

18 

6. 


4 
8 

48 


ieawipi 


TOTAL 

sec. 

•»  >.    <-<-^^<<n« 

- 

1 

< 

«-2- 

—  ■*-* 

«-2- 

•-2- 

-6 * 

OP'fiN 

/ 

2 

3 

¥ 

S 

6 

7 

TOTAL 
SEC. 

< 

^          1 

•      'f      1 

. 

'          ...                .  ■   <  <j     -  ■ 

OP-RN 

/ 

2 

3 

4 

5 

<5 

7 

SCAL£     '/»'*    t  sec. 

Another  easily  made  and  very  effective  means  of  expressing  data  is  by  the 
use  of  parallel,  horizontal  or  vertical  bars.  Assuming  it  is  desired  to  show  in 
comparative  form  the  net  earnings  of  a  profitable  business  over  a  period  of  years. 


I9I4 

$  2,000.00 

Net  Profits 

I9I5 

5,000.00 

I9I6 

10,000.00 

I9I7 

18,000.00 

I9I8 

25,000.00 

I9I9 

35,000.00 

1920 

50,000.00 

YEAR 

PROFITS 

RATIO    OF   INCREASE 

igM 
igi5 
ig/6 
/g/7 
/g/6 
/gig 
/g20 

f2O0O. 
5000. 
10000. 
I&OOO. 
ZSOOO. 
^000. 
5OO0O. 

=- 

Twenty-ninth  Lesson 


The  Curve: 

The  graphical  device  most  commonl}-  employed  in  the  presentation  of  sta- 
tistical facts  is  the  curve.  An  understanding  of  how  to  plot  curves,  and  how 
to  read  them,  should  be  part  of  the  equipment  of  every  business  man,  just  as 
it  is  of  every  engineer,  scientist  or  statistician.  The  general  scheme  of  curve 
plotting  is  very  simple,  as  will  readily  be  seen  by  constructing  a  curve  from 
the  figtires  used  in  the  last  illustration. 


'  75000. 
10000. 

esooa 

60000 
55000. 

soooo. 

4SOOO. 
■iOOOO. 
35000. 
30000. 
ZSOOO. 
20000 
ISOOO. 
lOOOO. 
SOOO. 

a 


I 


o 


/ 

/ 

_^_  _____  __*_ 

/ 
/ 
/ 

/ 

_  7 

f 
t 

t 

/ 
/ 
/ 

' 

/ 
/ 
/ 

7-- 


I 


5 


•0 


5^ 
9< 


In  the  above  figure  each  year  is  represented  b)'  vertical  lines.  Horizontal 
lines  were  drawn  for  each  $5,000.00  of  sales.  After  the  background  ruling 
has  been  drawn,  the  figures  for  each  year  are  laid  off  to  scale,  on  the  proper 
vertical  lines  to  represent  business  years,  and  a  dot  is  placed  on  each  vertical 
line  at  that  vertical  distance  which  represents  the  data  according  to  the  scale 
drawn.  Thus  the  figure  $2,000.00  would  be  indicated  as  a  dot  on  the  vertical 
line  for  1914  slightly  below  the  place  where  the  horizontal  scale  line  for  $5,000.00 
crosses  the  chart.  After  the  dots  for  business  years  have  been  placed  on  the 
vertical  lines,  the  dots  are  joined  with  a  heavy  line  and  a  curve  is  made. 

It  will  be  noticed  that  figures  are  given  at  the  top  of  the  chart  to  repre- 
sent the  value  for  each  point  plotted  on  the  curve.  This  information  is  desir- 
able for  anyone  who  wishes  to  know  the  value  of  any  point  on  the  curve,  as  he 
may  look  above  the  point  and  get  the  actual  figure  wanted,  without  having  to 
read  from  the  scale  to  the  left  hand  edge  and  then  estimate  roughly  the  value 


Twcntv-tiinth  Lesson 


of  any  point  which  happens  to  fall  in  a  space  between  two  horizontal  lines  of 
the  scale. 

It  is  reasonable  to  suppose  where  there  is  a  uniform  increase  year  after  year 
in  the  figures,  as  is  the  -case  in  the  above  illustration,  that  the  same  general 
average  will  be  maintained.  Expectations  of  this  nature  may  be  noted  on  the 
chart  by  extending  the  heavy  line  until  it  crosses  the  vertical  line  represent- 
ing the  next  year.  Extensions  of  this  character  are  made  by  dots  or  dashes 
and  denote  what  may  be  expected  of  the  future. 

A  curve  permits  of  a  finer  interpretation  than  any  other  known  method 
for  presenting  figures  for  analysis  in  comparative  form. 

By  means  of  the  curve  the  cost  accountant  can  present  the  data  concerning 
several  related  elements,  all  of  which  are  brought  out  more  clearly  in  their  re- 
lation one  to  the  other  by  graphic  presentation. 

The  relation  between  the  total  production  of  a  certain  article  and  the  ship- 
ments can  be  charted  over  a  period  to  show  the  investment  in  finished  goods. 
This  information  is  very  important  from  a  financial  standpoint,  as  it  is  desir- 
able to  have  as  little  money  as  possible  tied  up  in  inventory.  Assuming  the 
following  figures  for  one  year. 


Production 


January 

February 

March 

April 

May 

June 

July 

August 

September 

October 

November 

December 


300  Units 

350 
400 
400 
450 
450 
400 

45 
500 
600 
5CX) 
600 


Shipments 

200  Units 

300  " 

350  " 

300  " 

400  " 

350  " 

350  " 

300  " 

450  " 

500  " 

600  " 

650  " 


6S0 

600 
550 
500 
450 
400 
350 
ZOO 
250 
ZOO 
150 
100 
0 

PRODIA 

■.TION 

.,'''' 

SHIPM, 

■NTS 

/ 

\,'' 

/ 

/ 

.'   \ 

/ 

^ 

..•■■"■ 

^^ 

'^s^ 

^^ 

/ 

^^ 

^\ 

/ 

^x^ 

,,-'•'' 

'"•  ,. 

/ 

■■--, 

/ 

' 

5:            »            3=            Q:'            >:            S 

^       !j:       f       ^       ^       i 

a          >-          «>         fe:          ►-•          ^'         »j 
1          ^          $         1          ^          i         ^ 

■ 

8 


Twenty-ninth  Lesson 


Fluctuations  in  the  unit  cost  of  direct  materials,  direct  labor  and  indirect 
charges  for  different  cost  periods  can  be  vividly  portrayed  by  the  curve.  As- 
suming the  following  figures  represent  the  unit  cost  of  an  article  produced  each 
month  for  a  period  of  twelve  months. 


January 

February 

March 

April 

May 

June 

July 

August 

September 

October 

November 

December 


Direct  Materials 

$27.00 
25.00 
30.00 
30.00 
32.00 
3500 
37.00 
3500 
32.00 
30.00 
28.00 
25.00 


Direct  Labor 

$13.00 
12.00 
11.00 
12.00 
13.00 
14.00 
15.00 
16.00 
17.00 
15.00 
12,00 
9.00 


Indirect  Charges 

$15.00 
15.00 
15.00 
18.00 
18.00 
17.00 
16.00 
19.00 
20.00 
19.00 
16.00 
11.00 


Total  Unit 
Cost 

$55.00 
52.00 
56.00 
60.00 
63.00 
66.00 
68.00 
70.00 
69.00 
64.00 
56.00 
45.00 


Before  a  chart  can  be  made,  the  data  which  it  will  represent  must  be  col- 
lected and  tabulated.  The  cost  accountant  will  have  many  sources  to  which 
he  may  turn  for  facts,  all  of  which  must  be  compiled  and  the  correct  figures 
determined  before  graphical  presentation  can  be  made.  It  is  necessary  that 
the  arithmetical  accuracy  of  these  figures  be  unquestionable.  Incorrect  calcu- 
lations will  be  reflected  on  the  chart,  and  much  time  and  labor  will  be  wasted 
by  attempting  to  graphically  present  incorrect  figures  from  which  erroneous 
decisions  of  policy  are  apt  to  result.  / 

Considerable  care  should  be  taken  to  see  that  the  chart  is  drawn  so  as  to 
present  the  information  desired  in  as  logical  and  as  simple  a  manner  as  possible. 
Charts  should  be  constructed  with  the  idea  in  view  of  having  them  easily  read 
and  quickly  interpreted.  This  may  be  accomplished  by  having  the  general  ar- 
rangement of  the  chart  proceed  from  left  to  right  placing  the  figures  for  a 
horizontal  scale  at  the  bottom  of  the  chart,  and  the  figures  for  a  vertical  scale 
at  the  left. 

A  chart  should  always  be  supported  by  exhibits  of  the  numerical  data 
forming  the  basis  of  the  construction.  This  will  enable  the  executive  to  more 
closely  scrutinize  the  facts  by  readily  referring  to  those  parts  demanding  his 
attention.  ^ 

The  tremendous  amount  of  matter  relating  to  commerce,  accounting  and 
finance  which  is  printed  every  day  cannot  possibly  be  read  by  the  average 
person.  The  graphical  presentation  of  these  quantitative  facts  would  enable 
him  to  comprehend  them  at  a  glance,  resulting  in  accuracy  of  thought  and  a 
great  saving  of  time. 

In  constructing  a  chart  the  student  should  be  governed  by  a  few  rules, 
generally  accepted  among  engineers  for  graphic  presentation  of  facts: 

1.  The  earliest  date  should  be  shown  at  the  top  when  columns  of  figures 
relate  to  same. 

2.  Generally,  the  horizontal  scale  for  curves  should  read  from  left  to  right 
and  the  vertical  scale  from  top  to  bottom. 


Twenty-ninth  Lesson 


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10 


Twenty-ninth  Lesson 


3-  When  arithmetically  ruled  paper  is  used  the  vertical  scale  whenever 
possible,  should  be  so  selected  that  the  zero  line  will  show  on  the  chart. 

4.  The  zero  line  for  a  vertical  scale  should  be  much  broader  than  the 
average  co-ordinate  lines.      ...'^*'*'^ 

5.  When  the  zero  line  cannot  be  shown  on  the  bottom  of  a  chart,  the  bot- 
tom line  should  be  drawn  slightly  wavy  to  show  that  the  field  has  been  broken 
off  and  does  not  reach  zero. 

6.  Broad  lines  should  be  drawn  to  represent  the  point  for  percentages,  zero 
lines,  and  time. 

7.  Co-ordinate  lines  should  be  very  light  ruling  but  the  curve  should  be 
very  heavily  ruled. 

8.  Figures  may  be  shown  at  the  top  representing  the  value  of  each  point 
plotted  on  a  curve,  if  there  are  not  too  many  curves  in  one  field. 

9.  If  figures  are  given  at  the  top  they  should  be  added  to  show  the  yearly 
or  other  totals.     This  information  will  be  useful  in  reading. 

10.  A  clear  and  descriptive  title  should  be  given  to  each  chart. 

11.  Do  not  overcrowd  the  chart  with  too  man}'  different  curves. 

A  chart  constructed  with  a  great  amount  of  detail  is  difficult  to  interpret. 
The  most  important  facts  should  be  brought  out  and  the  detail  should  be  shown 
in  tabulated  form  as  supporting  exhibits. 

Whenever  possible  the  chart  should  show  comparative  figures  and  percent- 
ages of  the  current  period  with 

(a)  The  preceding  period. 

(b)  The  cumulative  figures  for  the  current  year. 

(c)  The  preceding  year. 

Comparative  figures  and  percentages  can  be  prepared  for  the  Balance  Sheet, 
The  Profit  and  Loss  Statement,  The  Manufacturing  Statement,  and  all  sub- 
sidiary exhibits  of  costs  and  be  attached  to  reports  as  supporting  exhibits. 

In  securing  for  himself  the  maximum  benefits  to  be  derived  from  graphic 
methods,  the  executive  has  at  his  command  several  different  mediums  or  devices. 

Maps  are  commonly  used  by  sales  managers  to  show  the  volume  of  dis- 
tribution of  his  product,  or  the  location  of  branch  houses  or  agencies,  value 
of  sales,  prospects,  or  any  information  to  which  this  method  of  presentation 
could  be  adapted. 

Control  boards  are  especially  adapted  to  keeping  a  check  upon  the  progress 
of  work.  If  the  various  processes  or  operations  can  be  separated,  a  board  can 
easily  be  made  to  record  the  completion  of  each.  Where  several  hundred  orders 
or  contracts  are  in  process  at  the  same  time  a  control  board  will  enable  the 
manager  to  determine  instantly  the  exact  condition  of  any  order  or  contract. 

As  a  means  for  instructing  the  employees  of  the  cost  department,  and  the 
employees  of  other  departments  who  are  brought  in  contact  with  the  detailed 
working  of  the  cost  system,  a  chart  in  the  form  of  the  following  illustration 
would  prove  to  be  of  great  advantage: 

11 

Twenty-ninth  Lesson 


Cost  System  Charts: 

The  cost  executive  by  charting  his  system  of  collecting  costs  will  find  the 
personnel  of  his  department  will  be  enabled  to  readily  understand  the  distribu- 
tion and  use  of  forms  and  the  allocation  of  charges.  Your  attention  is  directed 
to  the  "Chart  of  a  Special  Order  System"  as  an  example. 

The  cost  records  in  this  system  are  controlled  by  means  of  a  "Factory" 
account,  which,  as  you  have  learned,  is  kept  in  the  general  ledger.  This  account 
is  debited  with  all  the  factory  charges  of  material,  labor  and  indirect  expenses 
when  the  Accounts  Payable  account  is  credited.  The  Factory  account  is  cred- 
ited with  the  cost  of  sales  when  these  are  charged  to  the  various  sales  accounts. 
The  analysis  of  the  Factory  account  is  shown  by  accounts  which  are  kept  in  the 
factory  ledger,  and  its  balance  should  agree  with  the  total  of  the  balances  shown 
in  the  factory  ledger. 

You  will  observe  that  the  forms  necessary  to  record  the  authorization  and 
purchase  of  materials  and  supplies,  and  to  record  the  other  expenditures  in- 
curred, are  as  follows: 


12 


Twenty-ninth  Lesson 


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13 


Tzucniv-iiiitth  Lesson 


(i)  The  "Purchase  Requisition"  which  shows  the  materials  and  supplies 
required. 

(2)  The  "Purchase  Order"  which  is  sent  to  the  creditor,  ordering  the 
necessary  materials  and  supplies. 

(3)  The  "Invoice"  which  is  checked  when  received  with  the  purchase  order 
and  also  with  the  report  of  material  received. 

(4)  The  "Accounts  Payable  Voucher"  used  for  the  purpose  of  classifying 
the  expenditures  preparatory  to  their  entry  on  the  "Register  of  Ac- 
counts Payable." 

These  are  followed  by  the  forms  necessary  for  recording,  receiving,  storing 
and  requisitioning  of  raw  materials  and  supplies  put  in  operation. 

(i)  The  "Report  of  Material  Received,"  which  after  being  verified  with 
the  purchase  order,  is  entered  on. 

(2)  The  "Raw  Stock  Record" — unless  the  material  is  entered  directly  upon 
the  cost  sheet  of  a  particular  order. 

(3)  The  "Material  Requisition"  which  shows  the  raw  materials  required  for 
a  certain  order. 

The  "Report  of  Material  Delivered"  is  used  to  show  the  raw  materials  and 
supplies  put  in  operation.  The  information  relating  to  raw  material  is  trans- 
ferred to  the  "Production  Order  and  Cost  Sheet"  while  the  information  relat- 
ing to  supplies  is  transferred  to  either  the  "Process  Card  Record"  or  the  "Power 
Cost  and  Distribution"  record. 

The  compilation  of  the  .cost  data  is  made  upon  the  production  order  and 
cost  sheet.  The  information  for  the  material  charged  is  obtained  from  the  re- 
port of  material  delivered  and  the  information  for  the  labor  and  indirect  expense 
charges  is  obtained  from  the  process  card  record,  together  with  the  Time 
Reports,  which  show  the  productive  labor  time  upon  each  particular  order. 

The  productive  labor  cost  is  transferred  to  the  process  card  records  or  the 
power  cost  and  distribution  records  from  the  time  reports,  which  are  summar- 
ized upon  the  payroll  for  payroll  purposes  and  entered  upon  the  accounts 
payable  voucher. 

The  information  for  the  analysis  of  factory  expenditures  is  obtained  from 
the  Accounts  Payable  Voucher,  and  is  transferred  to  either  the  power  costs 
and  distribution  records  or  the  process  card  records.  Later,  all  information 
on  the  power  cost  and  distribution  records  is  transferred  to  the  process  card 
records.  The  cost  of  finished  stock  orders  or  finished  parts  is  transferred  to 
their  respective  stock  records;  and  in  case  any  finished  parts  are  put  back  into 
operation  for  completion,  the  cost  of  such  parts  is  transferred  to  the  cost  sheet. 
When  finished  parts  or  finished  stock  are  shipped  the  stock  records  are  credited, 
entries  being  made  upon  the  "Register  of  Sales  and  Costs"  from  the  dupli- 
cate of  the  bill  or  shipping  order. 

When  merchandise  is  returned  by  a  customer,  a  report  of  material  received 
is  made  out,  which  supplies  the  data  for  (i),  the  "credit  certificate,"  (2)  trans- 
ferring such  merchandise  back  into  either  part  finished  or  finished  stock,  and 
(3)  making  the  proper  entry  upon  the  Register  of  Sales  and  Costs. 

Organization  Charts: 

The  business  executive  can  see  his  office  equipment  and  his  employees,  but 
he  cannot  see  the  organization  itself  by  its  physical  appearance  alone.      An 

14 

Twenty-ninth  Lesson 


organization  chart  outlining  both  individuals  and  functions  with  specific  in- 
structions as  to  responsibiHty  should  be  prepared  for  every  business  that  is  not 
stripped  for  action,  tuned  up,  snugly  fitted  to  the  job,  and  departmentalized  in 
keen  relation  to  functional  sub-division. 

An  organization  chart  should  be  prepared  for  the  entire  business,  clearly 
defining  the  duties  and  responsibilities  of  each  officer  and  employee  and  those 
of  his  co-workers  with  whom  he  comes  in  official  contact.  Supplementary  charts 
may  be  prepared  for  each  department  more  definitely  and  decisively  fixing  both 
authority  and  responsibility  of  the  personnel. 

An  organization  properly  graphed  will  mold  men,  money  and  materials  into 
hard  hitting  units  by: 

(a)  Clearly  defining  the  duties  of  each  worker. 

(b)  Allocating  responsibility  by  placing  workers  in  charge  of  specific  duties 
under  the  direction  of  a  superior. 

(c)  Eliminating  duplication  of  the  work  of  one  group  of  workers  by  any 
other  group. 

(d)  Functioning  the  work  of  one  group  of  workers  with  that  of  co-related 
groups. 

(e)  Assigning  workers  to  the  jobs  they  are  best  qualified  to  perform, 

QUESTIONS  FORMING  THE  TWENTY-NINTH  EXAMINATION. 

1.  In  soijie  cases,  statistical  details  may  be  more  effectively  exhibited  by 
means  of  Graphic  Charts.  In  other  cases  the  details  may  be  more  effec- 
tively exhibited  by  presenting  them  in  statement  form.  State,  in  a  general 
way,  the  limitations  of  each  method  for  effective  presentation,  and  give 
your  reasons  therefor.  ] 

2.  State,  briefly  but  concisely,  your  understanding  of  the  dominant  purpose 
of  detailed  information,  which  is  required  by  an  executive,  and  the  rea- 
sons which  render  it  important. 

3.  In  view  of  your  answer  to  question  No.  2,  do  you  consider  a  graphic 
presentation  as  ordinarily  sufficient  to  meet  the  requirements  of  an 
executive?     Give  reasons. 

4.  What  do  you  consider  the  foremost  commending  feature  of  a  graphic 
presentation  to  be,  and  what  is  its  prime  requisite? 

5.  Labor  Turnover  is  referred  to  in  the  lesson,  as  a  fitting  subject  for 
graphic  presentation.  Assuming  that  you  desired  to  exhibit  the  effect  of 
Labor  Turnover  upon  volume  of  production,  and  also  to  exhibit  the  cost 
of  Labor  Turnover,  what  details  would  you  endeavor  to  exhibit? 

6.  Accuracy  and  simplicity  are  prime  essentials  in  determining  the  most 
effective  method  for  graphical  illustration.  When  the  results  to  be  ex- 
hibited favor  the  use  of  horizontal  or  vertical  parallel  bars,  or  the  circle, 
why  should  preference  be  given  to  the  former? 

7.  In  constructing  a  graphic  chart  for  the  purpose  of  exhibiting  comparisons, 
what  comparative  periods  do  you  consider  to  be  ordinarily  required? 

8.  A  Cost  System  involves  the  use  of  numerous  forms  and  records,  which 
bear  an  orderly  relation  one  to  the  other.  What  do  you  consider  is  the 
prime  advantage  of  a  chart  which  illustrates  the  working  of  a  cost 
system? 

15 

Tzventy-ninth  Lesson 


J.  LEE  NICHOLSON  INSTITUTE 

OF 

COST  ACCOUNTING 


STANDARD  BASIC  COURSE 


THIRTIETH  LESSON 


Copyrighted   1921 
J.  LEE  NICHOLSON  INSTITUTE  OF  COST  ACCOUNTING 

Chicago 


tjV 


This  lesson  is  received  by  the  student 
upon  condition  that  the  same  is  not 
to  be  made  the  subject  of  any  sale, 
gift  or  loan,  to  any  person  or  persons. 


THIRTIETH  LESSON 

Final  Examination. 

Conditions:    Written  answers  are  to  be  given  to  each  and  all  of  the  ques- 
tions, in  the  order  in  which  the  questions  appear. 

Questions  are  not  to  be  repeated.    It  will  suffice  to  prefix  each  answer  with 
the  number  of  the  question  to  which  it  relates. 

All  questions  relate  to  Factory  Cost  Accounting. 

1.  Name  5  detailed  reports  which  would  usually  be  required  for  recording 
material  costs. 

2.  If  the  machinery  of  a  plant  is  valued  at  $50,000.00  and  its  life  is  estimated 
to  be  13  years,  with  a  final  scrap  value  of  $1,250.00,  what  annual  rate  would 
you  use  for  the  purpose  of  providing  depreciation? 

3.  Give  a  formula  which  expresses  the  method  of  arriving  at  a  machine  rate 
(when  a  machine  rate  is  used)  for  charging  direct  labor  and  machine 
overhead  to  the  product  operated  upon  by  a  machine. 

4.  If  there  are  several  classifications  of  raw  materials,  finished  product,  stock 
of  finished  parts,  or  part  finished  stock,  is  it  absolutely  necessary  to  pro- 
vide accounts  upon  the  factory  ledger  for  each  classification?  Is  there  any 
advantage  in  doing  so?    Give  reasons. 

5.  Briefly  explain  the  purposes  of  the  following: 

(a)  Defective  Work  Report. 

(b)  Over,  Short  and  Damage  Account. 

(c)  Bill  of  Materials. 

(d)  Pay  Roll  Analysis. 

(e)  Special  Order  Cost  System.  i 

(f)  Process  or  Product  Cost  System. 

6.  Referring  to  reports  received  from  the  factory,  briefly  explain  in  a  general 
way: 

The  means  by  which  a  missing  report  would  be  brought  to  notice. 
What  disposition  is  made  of  the  costs  shown  upon  the  reports? 
How  are  the  costs  proved  at  the  end  of  a  cost  period? 

7.  State  the  principal  considerations  which  would  influence  you  in  determin- 
ing the  form  of  labor  reports  for  use  in  a  factory,  and  what  should  be  the 
ultima,te  purpose  of  the  report. 

8.  State  and  briefly  describe,  the  records  which  show  the  supporting  details 
for  each  total  of  the  undermentioned  factory  ledger  accounts  which  con- 
trol the  records  in  question: 

(a)  Raw  Materials  and  Supplies. 

(b)  Work  in  Process. 

(c)  Finished  Stock. 

(d)  Part  Finished  Stock. 

3 

Lesson  Thirty 


g.  Prepare  factory  Journal  entries  (without  using  figures),  which  will  ac- 
count for  the  following  details  at  the  end  of  a  cost  period,  the  details  being 
shown  on  various  summarizing  records: 

Raw  Materials  and  Supplies  used. 

Finished  Product  transferred  from  the  Factory  to  the  Stores. 

Cost  of  Sales. 

Expenditures  for  the  fa,ctory  pay  roll  and  for  factory  indirect  expenses 
were  paid  at  the  general  office,  and  advised  therefrom  to  the  office  of  the 
cost  department. 

10.  Design  a  form  of  cost  sheet  which  you  think  would  suffice  for  showing 
the  costs  of  a  special  order  involving  two  distinct  operations. 

11.  Design  a  form  of  Cost  Sheet  which  would  suffice  to  show  the  average 
unit  cost  of  four  products  manufactured  for  stock,  to  be  sold  from  stock. 

12.  From  the  following  details,  distribute  the  power  costs  to  Departments 
A.  B.  C: 

Total  power  costs  $1,806.00. 

Machine  records  show: 

Horse  Operating 

In  Department  A.  Power  Hours 

Machine  Ai  5  4000 

"        A2  8  4500 


(( 


A3  7  3500 


In  Department  B. 


Machine  Bi  6  4000 

B2  4  3500 


« 


In  Department  C. 

Machine  Ci  8  5000 

C2  3  4500 


Lesson  Thirty 


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